Divergences arise between equilibrium

Question

What divergences arise between equilibrium and an efficient output when spillover costs? How might government correct this divergence?

Answer 1

When spillover costs are present, the equilibrium output will be greater than the efficient output. This is because the producer, who is not bearing the full cost of production, will be able to produce more at a lower price than the efficient level, which would exist if true costs were reflected in the production decision.