Negative Externalities Essay

Negative externalities are costs caused by activities that affect an uninvolved party who did not choose to incur the cost. Cigarette smoking causes pollution which creates health problem for those who breathe in the air. This creates negative externality because secondhand smoke affects third parties that were not involved in the transaction. Graphically, this is when social costs are lower than private coats, and firs produce more unit than is social optimal. In these cases, government intervention is necessary to internalize this externalities. They can do this by the use of regulations or laws, or use market-based solutions. A number of command and control have been set in different states and in different countries. On June 22, 2009,

The use of corrective tax on cigarettes can reduce the number of smokers. “In the year after a 62-cent increase in the federal cigarette tax in 2009, cigarette sales declined by a historic 11.1%. Adult and youth smoking rates also declined” (Myers, 2014). With increase in cigarette tax, there is a reduction in smokers which has a very big impact on public health but also saving large number of smokers from premature death. But us we all know there is an extent to which this taxes on cigarettes work. Cigarette tax are the highest in New York at $ 4.35 per pack and with Massachusetts $3.51 just to mention a few. Evidence shows that wide differentials in cigarette taxes across the states have opened up market for smuggling cigarettes from low-tax state and selling them in high-tax state (Liz, Borean, 2014). The market –based solution are a potentially attractive to traditional command and control solution. The command and controls policies requires tobacco manufacturer to take specific action, they are laws that have to be followed and cannot change. With the market –based solution even though it helps internalize the externality, it also bring problem such as smuggling of cigarette into the country. To me I believe the command and control solution will be more effective as compared to be market based solution but if both are to go hand in hand I think the externality will be controlled