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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A glue factory and a steel mill emit smoke containing a chemical that is harmful if inhaled in large amounts. Describe three ways the town government might respond to this externality. What are the pros and cons of each solution?

To determine
A way to control externality.

Explanation

The three important ways of controlling externality, by the government, are as follows:

Regulation: The government uses command and control policies to regulate externality in the economy. The regulation controls the pollution at a certain level, but it is impossible to prohibit all polluting activity. For the successful completion of a regulation policy, it is required to have a lot of information about the industrial activity. However, the information is often difficult for government regulators to obtain.

Corrective tax: The tax enacted to reduce negative externality is called corrective tax...

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