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About The Regulations of Markets with Externalities
There can be two kinds of Regulations of Markets with Externalities, both imposed by the Government. Apart from command and control policies, the Government can make use of Market based policies like taxation and implementation of subsidies. This instigates private individuals or organizations who are the producers and consumers to reconsider their actions.
Government’s command and control regulation policies can range from predetermined standards, processing requirements to direct ban. This is done with the purpose of enforcing certain actions and completely forbidding some, keeping in mind the externality. Some instances of such regulations can be making certain areas ‘no smoking zone’ to prevent passive smokers from the harmful effects. Another instance can be forbidding companies from dumping their toxic chemical residues into the river water to save the environment and also the people who use that water.
However the government needs to have perfect knowledge of the economic impact these regulations would have before implementing them. When overdone, they can lead to inefficiency in the market. Using the method of incentives is preferable to forced regulations.
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