Question

An effective method of eliminating a negative producer to producer externality is:

a. legal action (i.e. victim sues offender).
b. eliminating the property rights of the two firms.
c. ignoring the problem.
d. a merger of the two firms.

Answer 1

One effective method to eliminate a negative producer to producer externality is to have better-defined property rights, which can clarify responsibilities and balance economic activity and pollution.

Step-by-step explanation:

In order to eliminate a negative producer to producer externality, one effective method is to have better-defined property rights.

This means clarifying and strengthening the idea of property rights to balance economic activity and pollution.

For example, if there is a railroad track running beside a farmer's field and the sparks from the locomotive set the field ablaze, the responsibility can be assigned either to the farmer to build a tall fence to block the sparks or to the railroad to reduce the number of sparks with a gadget on the locomotive's smokestack.

By clearly establishing the responsibility, the negative externality can be effectively managed.