Pollutions and External Costs - Case Study Example

POLLUTIONS AND EXTERNAL COSTS Introduction The modern era faces different types of problems related to the degradation of the environment. The issues can ultimately lead to the determination of the position and the future state of the human population. In the determination of the activity of the society, apart from the environmental concerns, the economic issues can be considered to take centre stage. For that matter, the integrated discussion and focus on the issues that be related to the environmental issues and economic concerns can be considered as a vital topic to explore. Thus, the main objective of the research conducted is to be able to present the issues that can affect both aspects of the society and human existence. The issue on pollutants and external costs associated with different aspects of the economy can be considered as one of the most current and important areas of concern in terms of these fields of disciplines. There are two important issues that are being focused in the study that was conducted. These can be connected to environmental economics where in issues in the environment can be considered on the perspective of the economic utilization and function. The main issue to be discussed is the interaction between the external costs and the environmental issue which is pollution. External cost is an economic concept that can be related to the consumption of products, goods and even services. There are different issues that can be connected to the externalities. One of the related concepts is the allocative efficiency in terms of the market system (Gibson, 1996). The focus of the research leans on the environmental aspect, thus, it can be perceived to be connected to the issue related to pollution. Pollution can be considered as one of the major concern in relation to the environment. It can then be considered related to the field of economy on the basis the supply of materials can be considered to be primarily by nature (Freeman III, 1979). Due to the fact that the production process can then be considered rendering materials efficiency of use can be connected to the issues related to economics. The Implications of Externalities for Allocative Efficiency Externality can be considered as one of the most important concept which can be perceived on the basis of different aspects. Externality can refer to the cost of the factors that can affect business transactions mainly the group that used the factor to be able to be related to a group. Thus, the externalities then can be perceived in cases wherein the group being supplied gains profit (Gibson, 1996). Due to the fact that every factor and component of the environment even the economic aspect can be considered to have a price. For that matter the sale of the products being produced, can be of great effect to the supplier company, although it can be considered as an indirect effect. In the study of the effects of externality, it is important to determine that the effects of the said concept can either be positive or negative (Gibson, 1996; Hussen, 2000). A negative externality can be perceived when side of the production or consumption of a particular product. One of the most significant examples of a negative externality in consumption is pollution. In such case then, externalities can be considered as an affect of the failure of the 3rd group. On the other hand, externality can also be positive wherein indirect actions in the society can improve the chance for good transactions. An example is the development of different types of remedies and medication (Gibson, 1996; Hussen, 2000). The presence of externalities can be questioned in terms of efficiency. This can be attributed to the fact that a system targets the efficient use of every part and every material. Due to the fact that externalities are based on the indirect effects of different factor, a sign of being weak, the study of the implications of externalities is a vital issue (Gibson, 1996; Hussen, 2000). In terms of the effects of externalities, allocative efficiency can be considered to work in an inverse relationship. This can be attributed to the fact that allocative efficiency can have negative social effects. The said concept can be considered as a form of failure. Efficiency can be difficult to be achieved specifically when these externalities are attached to a product due to the fact that the set price cannot reflect the true value of the product. The said scenario can be considered as negative externality (Gibson, 1996; Hussen, 2000). Negative externality can be illustrated by Figure 1. Source: (Gibson, 1996). Figure 1. Negative externality. In the figure Xp represents the quantity and Pm as the price. The company has a goal of meeting the D, demand, to be able to succeed. At the intersection of private marginal cost (PMC) and D, the transaction can be considered on its optimum. But negative externality with the graph, g, can greatly affect that can be considered detrimental to the transaction. This is when the demands are tried to be met while decreasing the externality. One effect is an increase in the price of the product (P*) which can be higher while decreasing the level of production which is X* (Gibson, 1996; Hussen, 2000). On the other hand, the case of positive externalities can be considered as a way to be able to reach allocative efficiency. In this case, market equilibrium can occur at quantity Qp and price Pm which can be described as the private marginal benefit (PMB). At this point, the marginal cost can be correctly estimated. In effect these components can create an external situation wherein the allocative efficiency is achieved (Gibson, 1996). Dollar per Year Source: (Gibson, 1996). Figure 2. The positive externality. On the basis of the negative and the positive externalities then, it can be perceived that although such factors can be considered as external issues in related to the profitability of the products, the said issues can be considered of importance. One is due to the fact that such concepts can improve the knowledge of the investors on the real situation related to profitability. Due to the rise of the said concept, it can be concluded that profitability cannot be abruptly considered on the amount earned. Seeing the capability of the worth of the product to be changed on the basis of such externalities can be considered as a key to realizing a need for a more in-depth study can be considered to satisfy the surrounding questions on profitability and efficiency. Solutions to Externalities Due to the possible detrimental effects of the involvement and presence of externalities, possible ways to resolve or overcome such issues are required. There are different ways to be able to solve the effects of externalities and these methods can be related to the increase in knowledge regarding the issue. Included in such ways are undertaking social conventions and setting up mergers. Establishment of regulatory limits can also be undertaken as well as Pigouvian taxes. There are other methods that can also be undertaken which are applied to be able to resolve and prevent significant effects (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). Social conventions can be considered as one of the methods that can be used to be able to resolve negative externalities on the basis of the attempt to negotiate differences that can result to such externalities. Discussion and negotiations can be considered as important specifically when there is lack of awareness in terms of the negative effects of decisions of certain companies. Understanding can be achieved through conventions. Aside from the sensitivity of the actions of each company, it is important to be able to be aware of the limitations that are set by the culture, thus, other related factors that can magnify the externalities can be prevented (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). Mergers can be considered as another way of decreasing the effects of externalities. The effects of the said resolution can be perceived to lessen externalities specifically when one company initially causes harm to the other. This can be exemplified by pollution than can affect the survival of other business. In such cases, merger can be undertaken to be able to help the affected companies while at the same time expanding the coverage of the business. The said resolution can benefit both companies at certain levels (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). Applying regulatory limits can be considered as another way of decreasing the effects of externalities. One of the most important example which can also be considered as the issue under study involves the regulation of pollutants. Commonly there are set standards that are followed in terms of the regulation of problems such as pollution but such resolution can be considered as a simple approach that can have limitations. One limitation is the standardization of the regulating procedures. Mostly such cases can be set through policies but the implementation can be a great challenge. Aside from that, equality can almost always be a hindrance in application (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). Corrective taxes can be another method way of regulating the externalities such as pollution. When fines are set, companies and producers themselves can regulate their actions to prevent payment of such taxes. Such monetary fines can be referred to as Pigouvian tax. This type of taxation specifically applies to pollution. It is measured on the basis of per unit amount of material equated to the possible marginal damage to the society viewed on the most efficient scenario (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). If the policies incorporated in the said method can be implemented properly, positive results can be achieved. But limitations can be met on the basis of application. Also in-depth study of the activity of the particular company involves investment of time and monetary values. Aside from the given possible choices of solutions that can be applied others include property rights that can be considered as an alternative which is legally-based. Coase theorem and bargaining is also another method. The said technique in resolving effects of negative externalities involves the promotion of bargaining that can result to interdependence, which is comparable to merger and other business relationships. Included in possible ways to be applied are tradable pollution rights and subsidies to be able to balance out negative externalities by increasing positive externalities (Chichilnisky and Heal, 2000; Freeman III, 1993; Gibson, 1996; Hussen, 2000). Pollution: Analysis and Policy Pollution can be considered as one of the most detrimental externalities that can be classified on the negative side thus can cause negative effects to the survival of certain companies and organizations. To be able to minimize the effects of such externality, policies are established and applied. One of the most important policies can be related to the regulation of the emitted wastes and pollutants of manufacturing companies. Emission reduction can be considered as the most essential and vital action and also the focal point of environmental policies and even reforms. One example that can be cited is in the conjecture of the transferable discharge permit (TDP) market. In such case, TDP markets can support and give confidence to the company to obey the policies through allocation of control responsibility in a cost-effective manner. Due to the fact that such policies are superseded by EPA, a need to conform to higher more regulated policies is always at hand, but due to the specificity of application, he problems at hand can be handled better (Tietenberg, 1985). Conclusion The relationship between pollution and external costs had been presented through the discussion of the concept of externalities and allocative efficiency. Pollution can be considered as one of the most detrimental negative externalities due to the fact that it can cause significant effects to the value of the products and the performance of other companies and manufacturers. To be able to handle such effects, methods of resolution had been studied and presented by the experts of the interdisciplinary field of environmental economics. Regulatory policies can be considered as one of the most common and primary ways of decreasing the effect of pollution. Although this is the case, problem of regulation and implementation remains. In such scenario, the effects of externalities also remain. The failure of the market to be able to resolve such problems can result in the inability to achieve allocative efficiency which can cause detrimental effects to the performance of the company in the long run. References: Chichilnisky, G. and Heal, G. (eds.) (2000). Environmental Markets: Equity and Efficiency. New York: Columbia University Press Evans, A. and Wingo, L. (eds.) (1977). Public Economics and the Quality of Life. By the International Conference on Perception and Action and Symposia on Stress and Coping. Baltimore, MD: The Johns Hopkins University Press. Freeman III, M. A. (1993). The Measurement of Environmental and Resource Values: Theory and Methods. Washington, DC: Resources for the Future. Freeman III, M. A. (1979). The Benefits of Environmental Improvement: Theory and Practice. Baltimore: Resources for the Future. Gibson, H. (1996). Externalities: Implications for allocative efficiency and suggested solutions. Available from: Read More