Gian Marco Belardi
Kingston University
EC 5004
17/12/2015
Negative Externalities: Pollution
In our daily lives we come across people that often wish at some point to go live in country sides. This usually occurs because in cities or industrial areas one is constantly exposed to pollution. In economics, environmental pollution is an example of social cost, and it is often defined as a negative externality. In other words, pollution negatively affects first, second and third party organizations as well as individuals, which incur additional economic costs, also called transaction costs. However, “pollution” is a very general term, this is because there are many ways that individuals or firms can damage the environment. Consequently, there are
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also several regulations that the government may adopt in order to counter this social issue. Usually, the average person would say without any doubt that pollution is certainly a bad aspect of our society. Generally speaking, this statement is true, especially when we talk about health or any other common issue. However, there is to reconsider this statement in terms of economics. Is it possible to imagine a world without pollution? And would it be the same? The answer to both questions is simply “no!”. Several items the we use on a daily base that are very useful at home or at work are made by industries that pollute the environment. Sometimes there is just no way around it, firms and industries have the unpleasant need to pollute in order to supply their goods and services to the population. Consequently, this means that banning pollution would lead to a loss of many products, changing the world significantly. So the benefit of pollution relies on the fact that it is a bigger loss to ban polluting products as we cannot afford to live without them, therefore it is more efficient to live with this trade-off. The government can intervene in these cases with several manoeuvres that are useful for balancing society, making firms make up for what they harm. The equilibrium, or the right compromise between the level of emissions and quantity produced is a point called, “The efficient level of pollution”. Therefore, the emissions allowed are limited and set to a level where the amount of the good produced equals exactly the marginal social cost (MSC). The most common way to price-regulate a negative externality is by using Pigouvian taxes. This taxation system was named after the British scientist Arthur Pigou, and it is usually used on activities that create negative externalities. This means that it is possible to reduce the output of negative externalities with a simple tax. If the government imposes a tax (T) on per unit output of a good that creates negative externalities the supply curve “MC” would shift to the left up to MC+T (supply plus the size of the tax imposed by government). As a consequence, a shift of the supply curve to the left would significantly increase price and decrease the quantity supplied. In a real life example, Pigouvian taxes are often used on polluting power plants in order to incentive the industry to adopt eco-friendlier systems, or to simply reduce output produced. Moreover, products that contain tobacco like cigarettes are a very easy target for Pigouvian taxes, which explains why they are so expensive, hoping that sales will decrease. Governments can also use legal regulatory limits in order to prevent a high amount of pollution.
In this case, we call these regulations quotas. A quota has the objective to maintain a limited number of negative externalities. In presence of a negative externality, a quota manages to function only if set below the free-market equilibrium quantity. Therefore, it shifts (like a Pigouvian tax) the supply curve to the left, forcing the market to produce at the quantity where he quota has been set (Q*). Quotas are extremely versatile and useful, for example: in order to prevent excessive hunting and fishing there are quotas set on licences, also, they are always used to set restrictions in car industries to lower emissions and car …show more content…
noise. When talking about Pigovian taxes and quotas there is to understand that both of the two regulations are viable.
However, there are situations where one type of government intervention is better the other. Unfortunately, we can only deduce which one is more suitable in certain conditions, as there is no way one can precisely calculate the success of the regulations. Therefore, a strategy that one can implement for deciding whether to implement a price mechanism or a quantity mechanism can rely on the steepness of the lines. When the marginal cost of pollution (MCP) is relatively steep compared to a relatively flat marginal benefit of pollution (MBP=MAC) then, it must be true that analysing the dead weight loss a quantity mandate set on the left is much smaller than the dead weight loss produced by a Pigouvian tax. In contrast, a when the MCP is relatively flat compared to a steep MBP, then the area of the deadweight loss of the price set to the left by a quota is substantially bigger than the one set by a
tax. Most of the times it’s arduous to determine the correct amount of quotas and taxes, in addition, if this reveals to be imprecise or completely wrong the damage may be even more catastrophic. Often firms face a period where the output is not stable, and consequently also price. Since regulators of the normative cannot adapt to all of the firms in the market there is another way to regulate negative externalities appropriately. With tradable permits, firms jointly decide the best way to reduce the externality at the optimal level. The government has the duty to release the permits among the firms, which can be traded between firms in order to allow some firms to pollute more than other firms. In conclusion, pollution is an externality that is fundamental in our society. Even though sometimes it’s a big cause for health issues, humanity cannot give up the products that are brought to us through the use of pollution. Through time, we have learned to live with it, thanks to the regulations that the government imposes to counter threats. Every year the regulations become more severe, and with development, in the future humans will become eco-friendlier, and hopefully arrive at a point where pollution will be banned without any trade-off.
Stocking, A. (2011). Unintended Consequences of Price Controls: An Application to Allowance Markets. Journal of Environmental Economics and Management, 63, 120-136. doi: 10.1016/j.jeem.
Some provided examples of externalities were second-hand smoking, pesticide, and the post-antibiotic crisis. One of the remedies for a negative externality was compensation, which for one of the examples--the banana plantation owners and fishermen--I felt was unrealistic and weak. The idea was to reduce the negative externalities or the marginal social cost of polluting the fishing waters by reducing the output of bananas, which is compensated with money. It eventually reduces the output of bananas to the point in which the marginal social cost equals the market price for bananas. The transaction would work if both groups are in agreement and there are no barriers to information. That’s just unrealistic. Since the pesticide for growing bananas is legal and the fishermen are asking the plantation owners for help, the fishermen have considerably less bargaining power, making compensation difficult to execute. In addition, the pesticide is also a destroyer of environments, fishermen industries, and human health, so I would expect the the marginal social cost to be way higher. No bother placing a tax on it for monetary gain or for Pareto efficiency; rather, it’s better to ban it due to huge long-term negative
According to Paying for International Environmental Public Goods, which is written by Rodrigo Arriagada and Charles Perrings, it mainly discusses how to prevent international environmental public goods (IEPG). There are many offset systems within a nation, which are set to prevent public goods. However, there is not an international authority to protect the undersupplied public good. People can gain many benefits from IEPGs, but they don’t have solutions for the problem of undersupply. In this article, Public goods are defined as “pure” only if they are non-exclusive and non-rival in consumption, whereas impure public goods are either partially excludable or rival. It’s impossible for any state to gain these kinds of public goods by itself; its supply depends on worldwide cooperation. However, new networks have changed people’s social participation and the way of exchange ideas. This raises concerns within the ethical liabilities of individuals, organizations, countries and cooperation and the alternative forms of governance of the biosphere. According to the article, “Three common examples of public good supply technologies are ‘additive’, ‘best shot’, and ‘weakest link’ technologies.” The additive technology consists of simple sum and weighted sum public goods. The best shot public goods is benef...
Case Study - Corporate Obstacles to Pollution Prevention. Overview This case focuses on corporate obstacles to pollution prevention. Pollution prevention can be complex, especially for large corporations. There are many different forms of pollution prevention, including emissions control devices and incremental changes in existing technology.
One of the most important factors that is not presently acknowledged when calculating well-being the affects of pollution and natural resource depletion. The land is the most basic foundation for virtually every good produced and needless to say, once it has been stripped of its raw materials, the consequences will resound globally. Damage to our environment adversely affects each aspect of well-being: health, happiness and prosperity. We cannot hope to be healthy without clean air and water, nor can we hope to be prosperous without the materials needed to make goods. And we most certainly cannot hope to be happy when everything around us is sick, stagnant and useless. Unfortunately, GDP actually considers the activities which create pollution as gains to well-being.
One of the major areas in which the government intervenes is in the agricultural sector of the economy. The government has three ways it can intervene and help its producers. These ways include price policies, direct payments, and input policies. Price policies have the largest effect on producers. Tariffs, quotas, and taxes are just a few examples of price policies. While these policies bring revenue into the government, in the end they hurt consumers. Each of these policies raise the prices of both imported and native goods. They are designed to help stabilize prices and give the native producers a chance to compete with foreign goods. Under the doctrine of laissez-faire, the government would not interfere with prices and the native producers would be forced to lower their prices, giving the nation's citizens a better deal in the market.
The rules of multilateral trade are designed to eliminate trade-distorting practices, which are harmful to the environment. For example, subsidies to the fishing sector may encourage unsustainable fishing practices, agricultural subsidies can support environmentally harmful agricultural production, and tariffs on environmental goods and services can restrict the dissemination of clean technology. Also there is the environmental Kuznets Curve hypothesis, which shows a relationship between environmental degradation and levels of income. This show that in the early stages of economic growth, the environmental degradation tend to be worse, but when the economy rise in per capita income and reach a certain point, the environmental damage reduce. This suggests that opposing them slows down the eventual environmental improvement in poor countries. According to Hassoun, poverty and the environment are connected in a way that poor people do not have access to electricity or gas, so they have to burn a lot of wood and coal to cook. Burning coal contributes about two-fifths of the world 's carbon emissions. By reducing poverty these may help reduce environmental problems. In some countries, the World Trade Organization (WTO) can implement more policies that can be used to progress the situation of the poor while also helping the
He concludes by saying, these low wage countries should contain high pollution. The premise of Summer’s argument is assumed true, so his argument is invalid, but strong. (C1) Many agree with Summer on his stance of high-pollution industries in lesser-developed countries. They claim that it is economic logic to fill the countries with low wages with profitable industries.
Three examples of positive externalities and their impact to society include; the construction and operation of an airport in an area. When an airport is newly created in a society, local businesses will eventually benefit from its operations due to increase accessibility.
What is the socially optimum level of production keeping in mind the environment? How should it be achieved? It is at this point that the great economic minds of out time begin to take up arms. Michael Porter, a Professor of Business at the Harvard Business School claims that environmental regulation of businesses will actually give the businesses a competitive advantage over their counterparts in nations with less stringent regulation because it forces them to innovate. Porter claims that by changing their production processes, the businesses will actually lower their production costs (Porter, 97).
Evo Morales stated, “Sooner or later, we will have to recognize that the Earth has rights too, to live without pollution. What mankind must know is that human beings cannot live without Mother Earth, but the planet can live without humans” (Pollution Quotes, 2013). Hence, attention must be provided to this devastating issue. Pollution is the introduction of contaminants into the natural environment that causes adverse changes (Wieman, 2013). There are numerous types of pollution, such as light, air, land, water, noise, thermal and radioactive pollution. In an article, the author highlighted that according to Richard Buckminster Fuller, “Pollution is nothing but the resources we are not harvesting, we allow them to disperse because we’ve been ignorant of their value” (Farrell, 1971, p. 52). Pollution is created mostly by human actions, but can also be a result of natural disasters. Pollution can harm the environment of the world and its inhabitants in many ways. Pollution has a detrimental effect on any living organism in an environment, making it virtually impossible to sustain life (Enclyopedia - Pollution, 2008).
Efforts to improve the standard of living for humans--through the control of nature and the development of new products--have also resulted in the pollution, or contamination, of the environment. Much of the world's air, water, and land is now partially poisoned by chemical wastes. Some places have become uninhabitable. This pollution exposes people all around the globe to new risks from disease. Many species of plants and animals have become endangered or are now extinct. As a result of these developments, governments have passed laws to limit or reverse the threat of environmental pollution.
The effects of environmental problems such as climate change, destruction of natural habitat, carbon emissions, pollution of air, soil and water are shown in various forms. With the aim of leaving a more inhabitable environment to the future generations, besides increasing awareness towards mounting environmental problems, the urgency to take measures against them also emerges. The embodiment points of the awareness and measures can generally be said to occur in three ways. Firstly, the legislative measures against the pollution of air, soil, water and the legislative regulations for carbon emissions, climate agreements, mandatory recycling and using of renewable energy. Secondly, as important actors of marketing, companies consider shareholders and pay attention to environmental conscience from product design to product manufacturing process; from promotional activities to product use and disposal stage. Thirdly, the expectations, perceptions and consumption preferences of the consumers, who are one of the most important shareholders of the companies, toward the green contented prod...
What is pollution? Pollution is a detrimental enemy to all species that walk on earth. It is a product of mankind carbon foot print on the environment. It consists of chemicals or particles in the air that can harm the health of humans, animals, and plants. Pollution occurs when pollutants contaminate the natural surrounding; which brings about changes that affect our normal lifestyles adversely. Pollutants are the key elements of pollution which are generally waste materials of dissimilar forms. Pollution disturbs our ecosystem and the balance in the environment. With innovation and development in our lives pollution has reached its peaks; giving rise to global warming and human illness. When raw materials, water, energy and other resources
However, with more production come more external costs like pollution. Identifying and estimating a monetary value for air pollution can be very difficult to do but is important for economists concerned with the impact of economic activity on our environment.