Negative Externalities

Question 1

Correcting for negative externalities

Answer 1

To make firs and/or consumers take into account when producing cigarettes.

Question 2

Advantages of correcting for negative externalities

Answer 2

1. The polluter will pay
2. The tax revenue raised can be used to compensate the victim
3. It allows the market to operate
4. It can be adjusted according to the magnitude of the problem.
5. May encourage innovation and the development of new technology.

Question 3

Disadvantages of correcting for negative externalities

Answer 3

1. Inflationary - cost push inflation
2. Cannont accurately calculate the external cost
3. Setting the right tax is difficult