the broader social cost of their behavior, they would have an incentive to reduce the production of whatever is

causing the negative externality. In the case of a positive externality, the third party obtains benefits from the
exchange between a buyer and a seller, but they are not paying for these benefits. If this is the case, then

markets would tend to under produce output because suppliers are not aware of the additional demand from

others. If the parties generating benefits to others would somehow receive compensation for these external

benefits, they would have an incentive to increase production of whatever is causing the positive externality.

12.2 Command-and-Control Regulation

Command-and-control regulation sets specific limits for pollution emissions and/or specific pollution-control

technologies that firms must use. Although such regulations have helped to protect the environment, they have
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