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Economics explained


Market failure

Government intervention and negative consumption externalities

Government intervention and negative consumption externalities

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Legislation is also widely used in situations of negative consumption externalities. In the case of individuals, it is illegal to drive when drunk. Drunk driving imposes costs on others in the form of accidents and death.


The banning of smoking in public places is an example.


The provision of information is also appropriate in this case of market failure. For example, raising awareness about the dangers of smoking.

Indirect taxes

Market failure can be corrected by imposing an indirect tax on those who have caused the negative consumption externality. The supply curve shifts to the left; if the tax is the same as the external cost, then the quantity traded will fall to Q0. Allocative efficiency will now be achieved.

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