Answer :
Externalities are corrected using strategies such as direct regulation, market-based solutions like cap and trade, Pigovian taxes and subsidies, and private solutions including moral codes, charities, and business mergers. These methods address market failures caused by transactions that do not account for their full impact on society.
Private bargaining, markets for externality rights, specific taxes, liability rules and lawsuits, and direct controls are all examples of methods for correcting externalities. Externalities represent the hidden costs of economic transactions, often leading to market failures when the outcomes don't align with the optimal well-being of all stakeholders. To counter these failures, governments may employ various strategies.
Direct regulation involves commanding firms to alter their behavior to mitigate negative externalities. For instance, a firm might be ordered to reduce its emissions or a landowner might be required to clean up their property.
Market-based solutions like cap and trade systems set up property rights and use the market to allocate resources efficiently, allowing for the trading of emissions credits. Pigovian taxes and subsidies influence market participants to reach socially optimal outcomes by internalizing external costs.
There are also private solutions such as establishing moral codes, the work of charities, and arrangements between businesses like mergers or contracts that benefit all involved parties. These diverse measures aim to compensate for the absence of a market for certain activities, like pollution rights, and work towards creating a socially optimal balance between production and its unintended side effects.
