Question

Efficiency is reached by allocating resources to those who have the greatest willingness to pay for them. This can be achieved in a market where a negative externality is present by:

Answer 1

Efficiency can be achieved in a market with negative externalities by using a marketable permit program which internalizes the social costs of activities like pollution.

Step-by-step explanation:

Efficiency in the allocation of resources in the presence of negative externalities such as pollution can potentially be achieved by introducing a marketable permit program. This program allocates permits to firms, allowing them to emit a certain amount of pollution. Firms that reduce their emissions below their permit level can sell their excess permits to other firms. This creates a financial incentive for firms to reduce emissions, internalizing the externality. The market thus coordinates social costs and benefits, encouraging the responsible use of resources and moving towards a more efficient outcome despite the market failure induced by externalities.