Explanation of Negative Externalities - Example

EXTERNALITIES ASSESSMENT By Student’s name Code+ Course name Professor’s name University name City, State Date Explanation of Negative Externalities As a matter of fact, negative externalities are defined as costs of marketing, consuming or producing products that are not borne by the consumers or producers of the products (Hackett 2011). In other words, negative externalities are costs that third parties suffer due to economic transactions. In such a transaction, the consumer and producer turns to be the first as well as the second parties, whereas the third parties comprise of any organisation, individual, resource or property owner that is affected indirectly (Hackett 2011). Also, negative externalities are known as external costs. Negative externalities also referred as social costs reasons for their occurrence is that, those expenses are normally never included in computing the production costs. Generally, production decisions are grounded on fiscal data and the majority of social costs are not calculated that way. For instance, the time that an organisation makes a decision of opening up certain new factory, it would never put into account the costs that the residents would accrue through drinking water from the river that the factory would have polluted. Resulting to that, a product which should not be produced as a result of total expenses exceeding returns is made as a result of not considering the social returns. Put in another way, the production costs embody marginal, private or individual costs (Hackett 2011). The societal marginal costs are higher than the private marginal costs that also capture the actual negative externalities’ costs. Owing to that, manufacturers overrate the ideal amount of the goods to manufacture. In the case of negative externalities, government intervention might become necessary for the achievement of economic efficiency the moment that the externalities affect huge numbers of individuals or the time that interests of the community are required more than the negative externalities at hand. In point of fact, there are several ways of correcting the negative externalities which are coupled by their pros and cons. The first way of correcting negative externalities is direct controls (Hackett 2011). In this scenario, the direct method of reducing negative externalities from a particular activity is through passing legislation that limits that specific activity. Such a direct control forces the corporation to suffer the offending activity’s actual costs. In history, direct controls within the type of uniform emission standards – restricts on permissible pollution- have subjugated American air pollution policy. For instance, the 1990 Clean Air Act (1) compelled businesses and factories to install “maximum attainable control technology” to lessen emissions of 189 toxic chemicals by 90% between the years 1990 and 2000 (2) demanded a 30-60% decrease in tailpipe secretions from automobiles by the year 2000, (3) ordered a 50% decline in the consumption of chlorofluorocarbons (CFCs), that eat up the ozone layer (CFCs during that moment were broadly utilised as coolants in refrigeration, a foam blowing agent as a solvent within the electronics industries); and (4) compelled coal-burning utilities to slash their sulphur dioxide secretions by roughly 50% to lessen the acid-rain damage of forests and lakes (Hackett 2011). Actually, clean-water legislation restricts the quantity of detergents, heavy metals as well as other pollutant corporations can emit into bays and rivers. Toxic-waste laws put forward the special dump sites and procedures for disposing polluted solvents and soils. Violation of those laws denotes fines, where in certain cases it calls for imprisonment. In point of fact, direct controls increases the marginal production cost as the corporations ought to maintain and operate pollution-control machinery. This makes the product price to rise, thus decreasing the equilibrium output and eventually correcting the resources over-allocation. After correction of over-allocation of resources the efficiency loss disappears. The second approach of correcting negative externalities is through levying charges or taxes particularly on the associated good (Hackett 2011). As a matter of fact, taxes levied on negative intention makes producers/consumers pay the entire social price of that good. This decreases utilization and generates a more socially efficient result. Actually, with no taxes overconsumption would result as people have a tendency of ignoring the external costs. For instance, the government has put in place a producing excise tax on CFCs that use up the stratospheric ozone layer guarding the earth from extreme solar ultraviolet radiation. With that excise tax existing, manufacturers ought to make a decision of whether to expend or pay extra funds to develop or purchase substitute goods. In whichever case, the tax increases the CFCs marginal costs of production thus, altering private supply curve for that product upwards. Similarly, the government can also utilise the Pigouvian tax to lessen use of a particular service or good. For instance, the government might implement Pigouvian tax on beer for the purposes of discouraging consumers from drinking more of it. Despite the fact that tax serves as an extra cost of using beer, certain people would still prefer consuming beer as they might simply regulate their spending or might have their high incomes set aside for unrestricted spending. In such scenarios, the tax serves more like a basis of government income instead of a solution to the negative utilisation externality. Imposing taxes on negative externalities possesses some pros. First, taxes offer incentives to decrease the negative externality, like pollution (Hackett 2011). For example, cars have turned out to be more efficient in terms of fuel after the imposition of fuel taxes. The other benefit of tax is social efficiency. In this scenario, marginal social cost (MSC) = marginal social benefit (MSB) as shown in the graph below. The last and not least benefit of correcting negative externalities through taxation is that taxes increases government proceeds. In this case, the collected proceeds are used for doing other government jobs, like building schools and hospitals. On the other hand, taxes imposed on negative externalities possess a number of cons. First, it is hard to quantify the negative externality’s level, like the pollution costs from a particular car (Hackett 2011). The other disadvantage of implementing taxes on negative externalities is that the moment demand turns to be inelastic, raising the taxes higher does not decrease demand in great intensities. The other disadvantage of correcting negative externalities through taxes is that they cause inequality. In this scenario, some people are forced to stop using some products and services due to their high price being charged due the tax increment. On the other hand, raising taxes on basic commodities, like fuel forces poor people to live hard lives as they have to cook, commute to school, and work among others while wealthier people are capable of cutting back more effortlessly. The other disadvantage of using taxes is increased cost of administration (Hackett 2011). As such, raising taxes on certain goods and services compels corporations to experience higher costs of administration thus raising the prices of commodities and services that they offer which causes a negative impact to the society. The other disadvantage of tax is likelihood of evasion (Hackett 2011). In this scenario for instance, when the taxes on rubbish disposal is augmented fly tipping or illegal dumping records increased figures. Illegal dumping on the other hand causes negative health effects to the surrounding society. The other disadvantage of taxes is that it becomes hard to decide the person who is bringing about pollution. The other disadvantage of correcting negative externalities through imposing lower taxes is that they cause a very severe negative effect. For instance, radioactive waste turns to be austerely regulated as even a slight disposal problem that might emanate from the execution of a more lenient tax-based scheme, would bring about grave health concerns. The other disadvantage of taxing in correcting negative externalities is that it makes firms to institute layoffs to survive the tax cost (Hackett 2011). That makes people to become a burden to the government due to inability to access important quality services, like health. As such, the government is forced to pay for certain services of such laid off people thus hindering development in some ways. The other disadvantage of tax on correcting negative externalities is that higher taxes might bring about cost-push inflation that per se might possess injurious effects on the entire economy. That means that tax would affect people who even do not know the origin or the end of the pollution. The other approach of correcting negative externalities is through environmental protection agency regulations (Hackett 2011). As a matter of fact, a tax makes the wrongdoing corporation to pay. However, if cheaper taxes are in place than a substitute production method, the problem of solution is never solved. Therefore, the government should issue secretions permits which restrict the pollution amounts that a corporation should legally discharge. The disadvantage of government regulations is the presence of corrupt officials who might be blackmailed to allow for more secretions of dangerous emissions. The benefit of government regulations is that serious government with regulating emissions would be capable of controlling the amount of emissions though issuance of the appropriate limits. The other way of correcting negative externalities is through internalizing costs (). Actually, internalizing the exterior costs of goods is a good way of responding to the externalities issues. Through costs internalization, the real and higher social price and cost is achieved, and in so doing brings about an effective method of resource allocation. The basic presumption there is that costs internalization can measure the external costs. Case Study from China where a Negative Externality Exists in a Current Market Beijing succeeded in hosting the 2008 Olympic Games that it had applied for in 2001. As a result of winning the bid for hosting the Olympic Games, the city adopted a number of measures for guaranteeing quality air at the moment of holding the Beijing Olympics. The measures included rearrangement of industrial structure within Beijing. Interestingly, hosting of Olympic Games led to the shutting down of Beijing coking plant which was shifted to Tangshan back in 2007. On the other hand since 2005, Shougang was separately moved to Estern Hebei. However, the industrial structure did not last long after the Olympic Games as immediately after the contest, industries encircling Beijing were restored in full force and besides that, some few others were also constructed. The Wall Street Journal pointed out on 30th March that, the government of China had improved Beijing’s quality of air by 30% successfully the moment of Beijing Olympics. However, 60% of the improvement results faded away a couple of years later. The Journal obtained its report from the United States National Bureau of economic research. Kejuan Jiang NDRC Energy Research Institute professional pointed out that Beijing was lessening the utilisation of coal, whereas the encompassing area was still rising. Jiang also pointed out that those encompassing areas ought to take the zone-defense mechanisms the way Beijing was doing. Data within the ending months of 2012 displayed that; industrial production between different countries was increasing. That was accelerated by competition between the companies to make more profit and thrive in the business. Additionally, Beijing is situated within the south-eastern side of the Inner Mongolia as well as to the eastern side of Shanxi province, where both turns to be the main coal-producing provinces. As a result of the sinuous air, the Beijing’s surrounding industrial pollutants particularly the atmospheric pollutants within coal chemical industries concentrate areas of Inner Mongolia and Shanxi. What makes the matter worse is the fact that, Beijing turns to be Low-lying northwest all the way to southeast where it is encircled tightly by Yanshan Mountain and Taihang Mountain. As a matter of fact, the Beijing terrain is easy to bring about Heat Island Effect. In addition to this, the pollutants which spread from encircling areas and produced within Beijing are incapable of diffusing out and ultimately deposit at the underside of the pot terrain. As a result of construction of more industries in Beijing after the Olympics, many people have been attracted to the city in search of greener pastures. Therefore, within the course of the growth of the urbanization, the city’s scale expands continuously and subsequently traffic congestion, population expansion, environmental pollution together with other urban illnesses slowly appear. In recent years within the city of Beijing, in order to augment the urbanization process, Beijing has demanded more increasingly superfluous population. The Beijing Bureau of statistics pointed out in 2012 that; the Beijing’s entire population stood at 19,720,000 and the figure is moving upwards at an amazing rate of six hundred thousand in each and every year. A huge number of city populations have to use several resources, which puts forward the fact that atmospheric pollutants will continue being generated at the time of everyday energy consumption. The major energy that Beijing city uses includes natural gas, electricity, gas and coal. In point of fact, burning of coal gas might produce grave air pollution. The major components of coal gas comprise of carbon monoxide, methane and hydrogen. The worst thing is that the partially gas purification would bring hydrogen sulphide into blazing, a factor that would produce major air pollutants: sulphur dioxide, carbon dioxide. Additionally, the augmentation of population has contributed to the rising of Beijing’s motor amount. Despite the fact that Beijing administration has put in place a number of policies for controlling the rate of growth within Beijing City since the year 2011, the existing Beijing automobile populace had rocked a huge scale that in the year 2012 the amount of locomotive Beijing had reached 5,017,000 units. Motor Units from 2011 - 2012 Shockingly, some professionals’ statistics displayed that at the commencement of 21st century, automobile exhaust secretions accounted for 30-60 per cent of the atmospheric effluence. As a matter of fact, since the 90s together with the process of incorporating rural and urban areas of Beijing extension, the area of the city has been extended continuously that the rural-urban margin zone has been expanded to Six Ring. In the meantime, Beijing’s agricultural lands are declining sharply. In the year 2007, the cultivated land area in Haidian District was 2787.9 hectares. That was less than 12,559.2 hectares back in 1978. Huge tracts of farming lands have recently been utilised as residential, industrial and commercial land. As a matter of fact, Agriculture is the one that plays a major role in soil and water conservation, sand-fixing and air purification. Apparently, the agricultural regions encompassing the city make up a natural green ‘guard’ for the town, without which, Beijing would be particularly susceptible to wind and sand. In this case study, the type of market structure with the negative externalities is perfect competition. As such, companies are competing to make profit in the cheapest and best way possible while emitting dangerous gases to the environment. On the other hand, residents living within Beijing and its surroundings are living in the polluted environment where they also pollute it either knowing or not knowing as they have no choice. The residents have to consume coal, gas and petrol among others which pollutes the entire environment of everybody living there whether using fuel or not. Additionally, the residents also get employed by the companies that destroy the environment because they are also in search of money. As a matter of fact, pollution of air is the introduction in the atmosphere of biological materials, particulates or chemicals which occasioned the concentration of secondary pollutants and pollutants into a number of specific degrees. During the industrialization and urbanization, human beings release a variety of contaminants into the environment till the pollution of air becomes so grave that it has endangered the human race survival. At the commencement of the year 2013, Beijing was hit by grave air pollution, that is, haze and fog occurred recurrently. Surprisingly, the Xinhua news report pointed out that the standard of air quality of Beijing in January of 2013 were below the standard in exception of only four days. During the same month in Beijing, the most horrible air period, several people felt physical discomposure obviously, like hard breathing, headaches, and cough among others. Surprisingly, the data from the Beijing Municipal Centre for Disease Control’s from the month of January 14-20th, in excess of 770,000 of the prompt cases took place in scale 2 and beyond medical institutions within Beijing where ½ of them were cases of respiratory diseases. The scenario turns to be a reminder that 5 of the 8 nuisance occurrences are pertinent to the pollution of air, such as The Belgian Maas Valley Industrial Zone events, London smog event and the Los Angeles photochemical smog event. The diagram below shows how negative externality (pollution) comes about in the Beijing. Diagram of how Pollution Occurs How the Government has addressed the Presence of Externalities in the Market. The Chinese government have taken measures to control the environment within the last ten years. The government has ratified the Environmental Protection Law, Air Pollution Prevention Law, Environmental Impact Assessment Law, Water Pollution Prevention Law as well as other regulations and laws regarding protection of environment. Without reasonable doubt, Chinese administration has made tremendous successes on ratifying ecological regulations, setting of air pollution standards in the current years. However, due to the absence of environmental management and supervision, those environmental regulations and laws have not yet been strictly put in place. A number of local governments have interceded in the ecological safety law enforcement, endorsed those industrial ventures that are capable of attaining short-term economic gain, but possess high energy utilization and cause grave pollution of air. By offering funds to constraints, environmental manning agencies are incapable of executing routine monitoring of sources of pollution, that bring about the efficiency of operation of environmental safety facilities. On the other hand, Environmental security investment of urban infrastructure has risen every year, however, despite the rise, the escalating proportion is far distant when comparing to the Chinese rapid extension of urban scale and the urbanization process. Presently, the environmental protection finances require rapid expansion, which has been above the existing national investment capability. Other Options for Dealing with Negative Externalities The first option is that the government should add up clean energy transformation, utilising natural gas rather than coal as fuel for cooking and heating. Additionally, old vehicle having high emissions should be discarded. That option would reduce emission of pollutants to the air, thus the government would not incur expenses of taking care of the environment. The other option is that the dust pollution control should be strengthened. As such, dusting construction crimes and construction infringements of waste carrying vehicles should be severely punished. Punishing dusting violations and offences would help in reducing contaminated dust in the atmosphere, thus decreasing the chances of people getting diseases which are a gain to the China’s economy. The other option is that environmental protection and development ought to be done concurrently in the urbanization of the future, and the oversight of that principle ought to be strengthened. Strengthening that principle would save costs of protecting the environment due to taking environmental protective measures at the right time. The other option of dealing with negative externalities is that environmental protection departments should exercise their administrative powers independently and government departments should not meddle randomly. Departments working independently would avoid duplication of work and thus enhance efficiency. That would save pollution control costs that would have been used by the government. Bibliography Hackett, S, C, 2011, Environmental and natural resources economics: theory, policy, and the sustainable society. Armonk, NY: M.E Sharpe. Read More