Choose an example of a negative externality and explain one policy which may help to solve it.

Smoking, specifically tobacco, is an example of a negative externality in that it harms negatively those outside of the original transaction. For example, a person walking down a high street inhaling second hand smoke was not part of the original transaction yet is still receiving the costs of the use of cigarettes. Another example of this could be increased taxes required to fund the costs to the NHS which are then felt as a cost by individuals who are not smoking. To solve this the government could attempt to reduce the external costs by limiting the use of cigarettes. This could be done through direct taxation on the goods, or by increasing the restrictions on buying such as age to buy or amount available to buy.