Question

Explain how negative externalities and, more specifically, pollution often result from a lack of clear property rights.

Answer 1

Answer:

An externality exists if a financial transaction affects the benefit to third parties. Externalities can be both positive and negative, depending if these affect the benefit to third parties on a positive or negative way.  

An example of a negative external effect is air pollution; a factory owner may lack the incentive to limit air pollutant emissions because the damage mainly affects someone else, that is, it doesn't affect his property, but someone else's property or common property (such as the case of the environment).

Therefore, if there were more specific regulations regarding property and the effects of the misuse of this right, contamination could be avoided.