Government Mechanism of Adjusting for Externalities in Market in 5 easy to understand points for economic exams for 5 marks
Sure, here's a simplified explanation of how the government adjusts for externalities in the market:
Identification of Externalities: government identifies negative externalities (such as pollution) or positive externalities (like education) that are not reflected in the market price.
Implementation of Taxes or Subsidies: To address negative externalities, the government may impose taxes on the producers generating the externalities, increasing their costs and reducing the quantity produced. For positive externalities, the government may provide subsidies to encourage more of the beneficial activity.
Regulation and Standards: The government can set regulations and standards to control the level ofities, such as emission standards for industries or quality standards for education.
Creation of Tradablemits: This involves the government issuing a limited number of permits for activities generating externalities, which can be traded in the market. This encourages firms to reduce their negative externalities and rewards those with lower external impact.
Provision of Public Goods: In some cases, the government directly provides public goods to address externalities, such as building public parks to counteract the lack of green space due to urbanization.
These actions help to internalize the external costs or benefits into the market, ensuring that the true social costs or benefits are accounted for in the decision-making process.