Final answer:
The development of tourism in an island economy can lead to pollution and reduced income for fishermen. The externality problem can be resolved through negotiations between fishermen and tourists if the fishermen have the legal right to a clean sea. However, if tourists have the right to pollute, government regulation may be needed.
Step-by-step explanation:
When there is a negative externality such as pollution in the tourism sector, it leads to a market failure and inefficiency. In this case, the fishermen in the island economy experience a decrease in income due to the pollution caused by tourists. To analyze the efficiency issue, we can draw a diagram of externality where the social costs of pollution are included.
If the fishermen have the legal right to a clean and undamaged sea, the externality problem can be resolved through negotiations between the fishermen and the tourists. The fishermen can charge the tourists for polluting the sea, effectively internalizing the cost of pollution. This would incentivize the tourists to reduce their pollution and limit the damage to the environment.
If the tourists have the right to pollute the sea and damage the environment, resolving the externality problem becomes more challenging. In this scenario, regulations and government intervention may be necessary to protect the environment and the income of fishermen. The government can impose strict pollution standards and penalties on the tourists to discourage pollution and ensure the sustainable development of the tourism sector.