Property rights play a crucial role in managing externalities, as clearly defined and enforceable property rights can help reduce negative externalities and promote positive ones. The Coase theorem, a fundamental concept in environmental economics, states that if property rights are well-defined and transaction costs are low, parties can negotiate solutions to externalities on their own, leading to efficient outcomes regardless of who holds the rights. For example, if a factory emits pollution affecting nearby residents, the assignment of property rights (either to the factory to emit pollution or to the residents to have clean air) can lead to negotiations to address the externality. If the factory has the rights, residents may pay it to reduce emissions; if residents have the rights, the factory might negotiate to compensate for the pollution. This approach, however, relies on low transaction costs and a clear understanding of property rights, which can be challenging in practice.

Governments typically respond to negative externalities through regulations, taxes, and subsidies. Regulations set limits or standards, such as emission standards for factories, to control activities causing negative externalities. Taxes, like carbon taxes, internalise the external cost, making it a part of the producer's or consumer's decision-making process. Subsidies are used to encourage behaviours with positive externalities, like subsidies for renewable energy. However, challenges arise in accurately quantifying externalities and determining the appropriate level of taxation or regulation. Over-regulation can stifle innovation and economic growth, while under-regulation can lead to significant social and environmental costs. Additionally, political and economic pressures can influence the implementation and effectiveness of these policies.

Social costs and benefits are integral to the concept of sustainable development, which aims to meet the needs of the present without compromising the ability of future generations to meet their own needs. When evaluating projects or policies from a sustainable development perspective, it is crucial to consider their social costs and benefits. This includes assessing not only the immediate economic impacts but also the long-term environmental and social effects. For instance, a project that generates short-term economic benefits but leads to long-term environmental degradation has high social costs, making it unsustainable. Conversely, investments in renewable energy might have higher initial costs but offer substantial long-term social benefits in terms of environmental preservation and health improvements. Therefore, considering social costs and benefits in decision-making is essential to promote sustainable economic growth that balances economic development with environmental stewardship and social equity.

Yes, externalities can be both positive and negative simultaneously, depending on the perspective and context. Consider a large music festival in a city. For local businesses like hotels and restaurants, the festival brings positive externalities in the form of increased patronage and revenue. However, residents living near the venue might experience negative externalities, such as noise pollution, increased litter, and traffic congestion. This dual nature of externalities presents a challenge in economic policy and decision-making, as actions that benefit some stakeholders can adversely affect others. Balancing these conflicting impacts is crucial, often necessitating interventions like regulations, taxes, or subsidies to ensure that the overall social welfare is maximised while minimising negative consequences.

Externalities are closely linked to the economic concepts of public goods and common resources. Public goods, such as national defense or public parks, are non-excludable and non-rivalrous, meaning they are available to all and one person's use does not diminish another's. When public goods are provided, they often generate positive externalities—benefits that are enjoyed by individuals who did not directly pay for or consume the good. Similarly, common resources, like fish in the ocean or clean air, are rivalrous but non-excludable. Their overuse can lead to negative externalities, such as depletion of resources or pollution, impacting society negatively. Understanding externalities in the context of public goods and common resources is vital because it highlights the role of government intervention in providing public goods and regulating the use of common resources to mitigate negative externalities and promote overall welfare.