<P> However, the most common type of solution is a tacit agreement through the political process . Governments are elected to represent citizens and to strike political compromises between various interests . Normally governments pass laws and regulations to address pollution and other types of environmental harm . These laws and regulations can take the form of "command and control" regulation (such as setting standards, targets, or process requirements), or environmental pricing reform (such as ecotaxes or other Pigovian taxes, tradable pollution permits or the creation of markets for ecological services). The second type of resolution is a purely private agreement between the parties involved . </P> <P> Government intervention might not always be needed . Traditional ways of life may have evolved as ways to deal with external costs and benefits . Alternatively, democratically run communities can agree to deal with these costs and benefits in an amicable way . Externalities can sometimes be resolved by agreement between the parties involved . This resolution may even come about because of the threat of government action . </P> <P> The private - sector may sometimes be able to drive society to the socially optimal resolution . Ronald Coase argued that an efficient outcome can sometimes be reached without government intervention . Some take this argument further, and make the political claim that government should restrict its role to facilitating bargaining among the affected groups or individuals and to enforcing any contracts that result . </P> <P> This result, often known as the Coase theorem, requires that </P>

Positive externality substitution effect negative externality income effect