Business – 6.1 External influences – Economic | e-Consult
6.1 External influences – Economic (1 questions)
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Two common government interventions are:
Pigovian tax – a tax imposed on the producer or consumer equal to the estimated external cost. Example: a carbon tax on firms that emit greenhouse gases, which raises the cost of pollution and encourages cleaner production methods.
Regulation (command‑and‑control) – setting legal limits or standards that directly restrict the harmful activity. Example: emission standards for vehicles that cap the amount of NOx released, forcing manufacturers to adopt cleaner technologies.
Both measures aim to internalise the external cost, shifting the private marginal cost closer to the social marginal cost and moving the market outcome toward efficiency.