Other than that, laws to stop pollution has to be implemented to the firms producing causing the pollutions. This will also move the marginal private cost closer to marginal social cost, the same effect as taxation. Other than that, tradable permits should be provided by the government. The government should put a limit on how much pollutants can be emitted each year. If the firm find that, they cannot seem to reduce the amount of pollutants it emits, they are able to buy the permits. This will increase the firm’s production and government are able to receive extra funds to help fix the pollution caused.
Tradable permits would lower the number of production of goods and raise the price of the goods.As for negative consumption externality, the government can regulate and set a limit on consumption of harmful goods which have a high spillover cost to society . For example, when buying a certain demerit good, a person can only be allowed to buy only one of the good.
Other than that, legal bans should also be implemented, such as age restrictions, to avoid the young generation to be consuming harmful products. Which is already being implemented for alcohol and cigarettes nowadays. Not only that, in London, they charge motorcyclists for them to drive around the charging zone at a certain time daily, which is called the congestion tax (Anon., n.d.). With that, the number of vehicles around the charging area is reduced, at the same time the pollutions caused by the vehicles are reduced as well. Other options for the government to avoid congestions and pollutions is to provide more public transportations.
Also, to subsidies the fares for the public transportation. If people feel that by taking the public transport is cheaper than driving, they would opt for the public transportations. Not to forget, bad advertising will also play a role in reducing externalities. By putting advertisements on the harmful effects of the demerit goods, it might be an eye-opener to the society about the after effects of the goods. However, this is all subjective and people’s preferences might not even change, but there is absolutely no harm in trying to avoid the externalities in the society.