. These arise because companies produce such things as pollution, which costs society a great deal but costs the producer nothing.
type of production and in any type of economy, some negative externalities of production are inevitable. The real problem created by negative externalities in the free-market economy is that because they are not a cost to the company, the company will see only what is profitable to itself, not to society as a whole. This will create inefficiency in the economy.
Economists recognize that negative externalities are a major problem. To combat this problem, the government
might try to force companies to internalize externality costs.
The famous economist Milton Friedman says that the government should require companies to pay for the costs of cleaning up the problems they create. This can be accomplished through pollution taxes and fees, making companies pay for the amount of pollution they produce.
This solves the inefficiency problem. If companies have to pay the costs of pollution, they can accurately compare the total costs and revenues of
production and determine if it is profitable to produce.
Of course, this solution is not perfect. The government still has to struggle with the question of placing a monetary value on such things as death, extinction, the destruction of forests, and many other social costs.
Moreover, it is not always easy to put this policy into practise. Regulations are not always enforced, and governments may simply choose to relax their standards in order to avoid hurting businesses.