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There are a number of government policies that can be used to solve environmental externalities. These policies include:

• Regulations: Governments can regulate the amount of pollution that businesses are allowed to emit.
• Taxes: Governments can tax businesses for the pollution that they emit.
• Cap-and-trade programs: Cap-and-trade programs set a limit on the amount of pollution that is allowed, and then businesses can trade permits to emit pollution.

Moral hazard

Moral hazard is a situation where people take more risks because they are protected from the consequences of those risks. For example, if a person has insurance, they may be more likely to take risks that they would not take if they did not have insurance.

Adverse selection

Adverse selection is a situation where people who are more likely to experience a loss are more likely to buy insurance. For example, if an insurance company offers a policy that covers heart disease, people who are more likely to have heart disease are more likely to buy the policy.

How moral hazard differs from adverse selection

Moral hazard and adverse selection are both related to insurance, but they are different concepts. Moral hazard is about how people’s behavior changes after they have insurance. Adverse selection is about who is more likely to buy insurance.

An example of moral hazard is a person who has car insurance and then drives more recklessly because they know that they will not have to pay for any damage that they cause. An example of adverse selection is a person who is more likely to have heart disease buying a health insurance policy that covers heart disease.