A variety of methods are used to deal with this problem. The effectiveness of these methods of government externality regulation varies.One simple method of reducing automobile pollution is to introduce a fuel tax. Using this system, the government can add an excise tax to the price of fuel, and require fuel retailers to pay a certain tax for each unit of fuel sold.
The effectiveness of this process depends largely on the elasticity of demand for fuel. This refers to the increased or decreased willingness of consumers to buy a product if its price changes. In the short run, fuel is quite inelastic, meaning that raising the price will not greatly decrease fuel usage. But in the long run, an excise tax will decrease fuel usage.
This solution does solve the problem of the negative externalities of auto
pollution. It might encourage people to buy cars that use less fuel (and hence pollute less), or to use public transportation. Both of these changes are environmentally desirable.
Another way to deal with the problem is through road pricing. While tolls attempt to recover the costs of building a road, road pricing attempts to recover the costs relating to automobile pollution in the area. This system may become more common in the near future.
To encourage people to take public transportation, which reduces pollution, the government may subsidize public transportation. This would make public transportation cheap and encourage people to use it. This method of subsidization has become unpopular recently, but is still widespread.
