Question

Which economic theory is commonly used to model environmental pollution as a market failure?

a. The theory of public goods
b. The theory of externalities
c. The theory of perfect competition
d. The theory of consumer choice

Answer 1

The theory of externalities is employed to understand environmental pollution as a market failure, where pollution taxes or tradable permits can correct overproduction caused by unaccounted social costs.

Step-by-step explanation:

The economic theory commonly used to model environmental pollution as a market failure is the theory of externalities. Pollution creates negative externalities because it imposes additional costs on society that are not reflected in the market prices of the polluting goods or services. When firms fail to incorporate these social costs into their production decisions, it leads to overproduction and market inefficiency. To address this, government intervention may include command-and-control policies, pollution taxes, or tradable permits to internalize the external costs and correct the market failure. Providing accurate information on the health and abatement costs of pollution is crucial to designing effective environmental policies.