Nova workboard

a blog from young economists at Nova SBE

Negative Externalities – How can we change people’s mind?

There are some reasons that make government intervene in the economy and one of them is to correct the market failures. We have a market failure when the market does not lead to economic efficiency. In order to avoid welfare losses, the government should intervene to increase the efficiency.

 Externalities are examples of market failure if the price mechanism doesn’t take into account the full social costs and benefits of production and consumption. They affect the economic agents not directly involved in the production or consumption of a good. Externalities commonly occur in situations where property rights over assets or resources have not been allocated, or are uncertain.

 In this post I’m going to focus on negative externalities. Negative externalities are activities where consumption creates a negative external benefit. In other words, is a cost that is suffered by a third party (any individual that is indirectly affected) as a result of an economic transaction. Smoking, air pollution, people who have anti-social behavior and social cost of drug abuse are examples of negative externalities that have to be avoided. Therefore, the government should intervene through many mechanisms. There are many ways in which intervention can take place:

  1. Legislation on emissions, restrictions to hunting of fishing, adopt less pollutant equipment
  2. Fiscal Policy Intervention by imposing indirect taxes, subsidies, tax relief and so on.


Despite of being crucial to remedy these situations, in my opinion, the greatest need is to change people’s mind. If we try to do that through funny activities, it’s easier to make people understand their duties as citizens, because fun can change behavior for the better.

Bottle Bank Arcade Machine is an initiative of Volkswagen that shows us how fun can be recycling. Through creativity they were well succeeded in their mission because people could play the game while helping the environment.  

Actually, intervention of the Government has an important role to increase the welfare in society and it should be done but are other different ways to change people’s behavior with simple initiatives like Volkswagen did. 


Rita Cordeiro #672


Author: studentnovasbe

Master student in Nova Sbe

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