Final answer:
Public sector charities do not typically serve as a government solution to externalities; instead, the government uses regulation, taxes, and tradable permits to address these issues. Command-and-control and market incentive based policies have distinct characteristics, with the latter providing flexibility to firms.
Step-by-step explanation:
The question pertains to how governments can address externalities caused by market activities. Public sector charities are not typically a government solution to externality problems; rather, they might coexist with or complement government efforts.
Classification of Pollution-Control Policies
- Command-and-control: Policies involving direct regulations, such as setting emissions standards or requiring technology changes. These are less flexible and often more costly but easier to implement.
- The federal government requiring domestic auto companies to improve car emissions by 2020.
- The EPA setting national standards for water quality.
- Market incentive based: Policies providing economic incentives to reduce pollution, such as taxes and tradable permits. These encourage firms with lower abatement costs to reduce more pollution.
- A state emissions tax on the quantity of carbon emitted by each firm.
- A city sells permits to firms that allow them to emit a specified quantity of pollution.
- The federal government pays fishermen to preserve salmon.
Negative externalities from pollution signify market failure, where firms overproduce polluting goods due to not accounting for the full social cost. Government intervenes to correct these failures with regulation, taxes, tradable permits, and in some cases, direct production of public goods or services.