Give an example of a private solution to an externality. Come up with an original idea. Why are private economic participants often unable to solve the problems caused by an externality?

Give an example of a private solution to an externality. Come up with an original idea. Why are private economic participants often unable to solve the problems caused by an externality?

 

 

Answer:

Example- There is factory near a school. The factory causes pollution which is not good for the school. In such a case , the factory can donate some amount of his profit to the school as charity. This can be used as a scholarship for the econonomically weaker sections of the students. Thus, the school and pollution can reach an understanding without the government intervention.

private participants are often unable to solve the problem of externality because the transaction costs involved in the decision making and bargaining are very high. Therefore, the government has to be involved.

Asked on February 15, 2018 in economics.
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