What are negative externalities, and what policies can the government implement to reduce them?

Negative externalities are one of the main causes for market failure, meaning that the market is not operating at its optimal level and that there is a loss of social welfare. Negative externalities are one of the most common form of market failure and they include everything that makes a third person, who is not involved in the consumption or production of a good or service, worse off. For example, this could be passive smoking, with uninvolved third parties being exposed to the health risk of passive smoking.
For the market to become more efficient and reach the social optimum level, the government can implement various polices. It can implement a tax on the good, so that the cost of production and consumption will be internalised. Yet if the good has an inelastic demand, a tax will not be able to shift the demand curve back to the optimum level. Inelastic demand often occurs, when consumers are dependent on the good or service, for example alcohol. Further there are other problems with taxing a good, like measuring the costs of the harm done and setting the tax at the right level. This can be very difficult, as with pollution, it is hard to measure what the cost should be for polluting the environment. Above that a tax on the good is regressive, so that income inequality will worsen, as a low income earner will suffer more from the increase in price than a high income earner. Another policy a government can implement is advertising in order to try to discourage consumption of a good. A problem with this is that it is often very costly for the government resulting in an opportunity cost. Overall, no policy is perfect when it comes to eliminating negative externalities, as all have their drawbacks.