A local factory emits pollutants into a river, which negatively impacts the fishing industry downstream. How would you classify this externality, and why is it essential for the government to intervene in this situation?

The situation with the factory polluting the river is an example of a negative externality. This means that the factory's actions harm others who are not involved in its production process, such as the fishermen and their families who rely on the river for their livelihood. When the factory releases pollutants, it decreases the water quality, making it harder for fish to survive and affecting the fishermen's catch. It is essential for the government to intervene because the factory may not have the incentive to reduce pollution on its own, as it does not bear the full cost of its actions. By implementing regulations or fines, the government can help protect the environment and the fishing industry, ensuring that everyone benefits from a cleaner river.