An externality is defined as a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. Malaysia went through rapid industrialization since the 1970s. However, one of the spillover effects or negative externalities is carbon emission. In 2019, former Minister of Energy, Science, Technology, Environment, and Climate Change (MESTECC), Yeo Bee Yin, said that Malaysia has no immediate plan to introduce carbon pricing to reduce carbon emission.

How do direct controls and specific taxes affect negative externalities? Briefly explain in terms of supply and demand.

(5 marks)

Explain the statement: "Clean air and water have become increasingly scarce and valuable resources because they have been treated in the past as if they were free and unlimited in supply." What methods might be used to internalize negative externalities?

(5 marks)

Should all pollution be banned? Why might some level of pollution be economically efficient?

(5 marks)

Describe how the market for externality rights or cap-and-trade system would work in terms of supply and demand.