How do regulations aimed at reducing negative externalities affect social costs and overall welfare in an economy?

Regulations aimed at reducing negative externalities, like pollution, help lower the social costs that arise when businesses don’t consider the harm their actions cause to others. For example, if a factory emits smoke that affects nearby residents' health, the costs of that health impact are not included in the factory's operating costs. When the government imposes rules to limit pollution, it forces the factory to clean up its emissions, which increases its costs but also reduces harm to the community. This leads to a better balance where the factory pays for its negative impact, ultimately improving overall welfare by making sure that people’s health and the environment are protected. In this way, regulations can help create a healthier economy where everyone benefits.