Pollution:
A) should be corrected by the subsidisation of polluting firms
B) is not an economic problem because it is external to the market system
C) is a common example of private production costs
D) is a common example of a negative externality

Question

Quizplus · Accepted Answer

Pollution is a negative externality, which means that the cost of pollution is not fully borne by the producers but is imposed on society. Therefore, correcting pollution requires interventions such as taxes, regulations or cap-and-trade systems. Subsidizing polluting firms would only encourage more pollution, exacerbating the problem. Pollution is not a private production cost because it affects third parties (e.g. neighbors, ecosystems, future generations) who have no say in the production decision. Pollution is indeed an economic problem because it creates inefficiencies and distortions in the market, and imposes social costs that are not reflected in market prices.