Evaluate question 4

Economists have proposed several different policies to solve the problems created by
negative externalities. These include taxation, regulation and the use of pollution
permits.
Discuss how effective any one of these policies may be in correcting the market failure caused by negative externalities.(12 marks)

Negative externalities is the when social cost is more than private cost of particular action .Normally, the consumption of demerit goods is accompanied by negative externalities.Such as the consumption of tobacco, alcohol and so on. It is information failure while the customer did not understand fully the harmful effect which resultd over consumption and production.(diagram)
By using tax,which is to put a higher tax on demerit goods, the supplier tends to produce less as the cost of production is high if the demand of the goods is price elastic. People tends to buy less since the price had gone up, in this case the tax is shared between supplier and consumer.(diagram)The tax would have much effect, if the demand of the goods is price inelastic, where although producer pass all the tax to consumer and they still buy it.
The tax would not be so effective, if there is an increase in wages, so people would have more disposable income and they tend to spend more and some of it will be demerit goods.It is hard to measure how much tax to be put on will be most effective. And supplier could provide misleading information that encourage more consumption.
And there is other negative externalities that caused by emission of CO2 which pollute the environment, in this case, a green tax would better take place, it followed polluter pay principle, an additional tax for extra pollutant.Tax might not be always the best and effective one, it largely depends on the current situation of people, elasticity and government priority