Overview
Purpose:
To define the concept of a "negative externality," to illustrate the effect of an externality on economic efficiency, to show the ways in which externalities can be internalized, and the use of cost-benefit analysis to determine the "optimum" level of pollution.
Objectives:
1. Market transactions do not always take all of the social benefits and costs of an economic activity into account. If private benefits and/or costs differ from social benefits and/or costs, an economic activity has "externalities." These externalities tend to disrupt economic efficiency.
2. Externalities can be internalized by tax and subsidy policies or by mandated control methods. A polluting firm can be taxed. This will force it to increase its selling price and therefore reduce its sales. Or the firm could be forced to install equipment that reduces the pollution. This also raises the product price, but forces the government rather than the firm to decide how pollution should be reduced.
3. There are numerous costs caused by pollution and all are difficult to measure (health, discomfort, damage to crops and painted surfaces, aesthetic, etc.).
4. Marginal social cost should equal marginal social benefit for the efficient allocation of resources of production from society’s point of view, and marginal cost/benefit analysis should be used to determine the optimal quantity of polluton.
| Key Economic Concepts externalities, marginal, private vs. marginal social costs, market inefficiency, benefits vs. costs of pollution abatement, pollution tax vs. pollution control, cost-benefit analysis. |
| Contemporary Issues In 2003 price of natural gas almost doubled, as a rise in demand was not matched by a similar rise in supply. Since natural gas is a cleaner fuel than coal or other fossil fuels, its usage has increased in recent years. At the same time, in the U.S., environmental laws restrict the drilling for natural gas, especially in the environmentally fragile areas of Alaska, where there are plentiful supplies. How can the government resolve this inherent conflict between two environmental goals? How might the government go about measuring the value of a cleaner environment versus the value of the Alaskan wilderness? Are there other ways in which such a conflict might be resolved (e.g. on the demand side of the market)? |
|
