Positive and negative externalities
Studies by Baldwin, Wyplosz, and Wyplosz show that positive and negative externalities have good and bad effects on the people and the environment (5). A positive externality is attractive to the consumer while a negative externality is detrimental to the consumer because a firm is not obliged to pay for the adverse effects of the negative externality on the environment. The mechanism that leads to a negative externality happens when a consumer pays less for an externality than the society, leading to serious market failures.
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Social and private marginal cost
For instance, manufacturing activities increase air pollution, which negatively affects the environment and the health of the people, leading to an increase in health care costs and environmental cleanup costs (Chatzimouratidis and Pilavachi 35). The environmental effects include an increase in global temperatures due to the high concentration of carbon dioxide in the atmosphere. That is a good example of market failure because the social marginal cost (SMC) is lower than the private marginal cost (PMC) (Matthews and Lave 12).
The sum of the imputed monetary value indicates the overall benefits of the society, which leads to product pricing mechanisms that do not reflect the true cost of externalities. The government can address such as situation by imposing taxes. A typical example is the externality cost of coal based on the complete life cycle of the production, use, and the effects of the emission of chemicals into the environment without including the market cost of the fuel (Sovacool 25).
Consuming power generated from coal plants leads to negative consumption externality, which causes a reduction in the well-being of the society and the environment. The situation reveals itself as one that does not allow for equal distribution of the adverse health effects caused by the emissions of pollutants on children, the elderly, and those with respiratory problems, and the environment.
What action has our government taken in order to provide this good or service in an equitable fashion?
To bring about the socially optimal market quantity, the government introduced relevant policies through the Environmental Protection Agency (EPA) to facilitate the development of alternative sources of energy to remediate the negative externalities. The proposed solutions that have been implemented include diversification and development of alternative sources of renewable energy such as wind and solar power (Frank, Bernanke and Johnston 29).
Government has imposed taxes rather than internalising an externality among the consumers, which is difficult to implement to create an equilibrium condition between the social marginal benefits and fuel costs. The tax acts as an input cost for internalising the externalities (McConnell, Brue and Flynn 30). Additional intervention measures include subsidies, regulations, use of better quality plants, and application of a corrective tax.
What are the alternatives to government intervention?
Establishing standards for compliance based on achievable targets, rate of return considerations, imposing emission fees and fuel taxes, setting aside considerations, establishing collaborative considerations, and integrating the allowance trade policy.
What has been the end result of government intervention?
The end results have been a significant decrease in the number of coal powered stations because of an increase in the government’s coordination activities with energy producing firms to establish better plans to minimise the effects of externalities on the people and the environment.
Baldwin, Richard E., Charles, Wyplosz, and Charles, Wyplosz. The economics of European integration. London: McGraw-Hill, 2006. Print.
Chatzimouratidis, Athanasios I., and Petros A. Pilavachi. “Multicriteria evaluation of power plants impact on the living standard using the analytic hierarchy process.” Energy Policy 36.3 (2008): 1074-1089. Print.
Frank, Robert H., Ben Bernanke, and Louis Dorrance Johnston. Principles of economics. New York: McGraw-Hill/Irwin, 2007.Print.
Matthews, H. Scott, and Lester B. Lave. “Applications of environmental valuation for determining externality costs.” Environmental Science & Technology 34.8 (2000): 1390-1395.Print.
McConnell, Campbell, Stanley Brue, Sean Flynn, Microeconomics: Principles, Problems, & Policies. London: McGraw-Hill, 2006.Print.
Sovacool, Benjamin K. “Critically weighing the costs and benefits of a nuclear renaissance.” Journal of Integrative Environmental Sciences 7.2 (2010): 105- 123. Print.