Discuss the private solutions to externalities

i) Internalize externalities:
Economists recognize that negative externalities are a major problem. To combat this
problem, the government might try to force companies to internalize externality' costs. In any type of production and economy, some negative externalities of production are inevitable. The real problem created by negative externalities in the free-market economy is that because they are not a cost to the company, the company will see only what is profitable to itself, not to society as a whole; this will create inefficiency in the economy. The famous economist Milton Friedman says that the government should require companies to pay for the costs of cleaning up the problems they create.
This can be accomplished through taxes and fees, making companies pay for the amount of
harm they do to society as a whole. This solves the inefficiency problem. If companies have
to pay the costs of pollution, they can accurately compare the total costs and revenues of
production and determine if it is profitable to produce. However the government still has to
struggle with the question of placing a monetary value on such things as death, extinction, the destruction of forests, and many other social costs and it is not always easy to put this policy into practice. Regulations are not always enforced, and governments may simply choose to relax their standards in order to avoid hurting businesses.

ii) Social conventions;
This deals with negative externalities through social conventions and tradition. The argument here is that "certain social conventions can be viewed as attempts to force people to take in to account the externalities that they generate. The example associated with this is impressing on people from a young age that even though one bears a cost by holding on to litter until a bin is found that one should do so because of the externality which litter creates. However its overall usefulness may be limited to low cost externalities generated by individuals.

iii) Property rights:
The establishment and enforcement of private property rights provide an alternate framework
for the solving of externalities. "A private property right is a legally established title to the sole ownership of a scarce resource that is enforceable in the courts." Private property rights offer a number of solutions to the problems posed by externalities. Firstly, the establishment and enforcement of greater private property rights by the legal system would allow victims of negative externalities to sue the offending party for compensation for the damage caused. For example, if property rights to a section of river are assigned to a particular fishing club, then that club will be able to sue the chemical firm/upstream which pollutes the river and kills the fish stock in the fishing clubs section of the river.

iv)Coase theorem and bargaining:
The other way in which property rights can assist in achieving allocation efficiency is by
providing a framework in which bargaining may take place. Consider the situation illustrated
in Figure 4.5 below which builds on the fishing club example.

---

NatalieR answered the question on June 21, 2022 at 09:09