Question

One way to solve negative externality problems is

A) to organize a limited boycott of the products.
B) subsidize the externalities.
C) eliminate transactions costs when property rights are not legally established.
D) issue pollution permits to polluting firms and establish a system of cap-and-trade.
E) establish and enforce patents and copyrights.

Answer 1

One effective method to address negative externality issues is by issuing pollution permits and establishing a cap-and-trade system, allowing firms to buy and sell the right to pollute, thereby incentivizing pollution reduction.

Step-by-step explanation:

One way to solve negative externality problems is to issue pollution permits to polluting firms and establish a system of cap-and-trade, as stated in option D. This system works under a marketable permit program where firms are given permits to emit a certain amount of pollution.

Firms that reduce their pollution more than required can sell their excess permits to other firms who need them. This program incentivizes firms to decrease pollution because it turns the ability to pollute into an economic good that is bought and sold, aligning economic interests with environmental goals.

It is a flexible and efficient approach compared to other command-and-control strategies, which are often not as adaptable to individual firm circumstances. Additionally, this method relies on well-defined property rights, which can help balance economic activity and environmental concerns, promoting socially optimal outcomes.