Most environmental regulations are designed to overcome the problem of negative externalities. These may be thought of as types of social regulation. Social regulation refers to the regulation of economic behavior to advance social goals in circumstances in which neither competition nor economic regulation are expected to work. The effectiveness of different types of social regulation in addressing these market failures. The economics of pollution control Pollution is a negative externality.
Pollution arises as a consequence of production and consumption both activities generate bads .
For example, factories often release particulate matter into the air to produce a good or service, households produce garbage as they consume goods and services. When firms pollute they are failing to recognize the scarcity of a resource a clean environment. The profit maximizing paper mill neglects the external effects of its production because its profits are not directly affected by them. The price that consumers pay for the product covers the marginal private cost of its production but not the external costs. This is also called the socially optimal level of output.