British American Tobacco - Coursework Example

A negative externality is generated by an action when it imposes a cost on someone else who had no control over the action. Types of externalities. The common externality attributed to cigarette smoking is the economic cost of health care to non-smokers as well as to smokers themselves. Another externality is the health effects of environmental smoke to non smokers and to their families. Report of CDC (2010) said that premature deaths and smoke related diseases in nonsmokers were caused by second hand smoke.

Smoking also pollutes the air environment, the lands, and water. Air is polluted by chemicals in the cigarette which is breathed out, cigarette butts end in the grounds and inevitably flushed in the water. The costs related to health maintenance and cleaning of the environment are negative externalities attributed to cigarette and tobacco. 2. Production process and what type of externalities are produced in each process Tobacco production starts with purchase of about 400,000 tons of tobacco leaf yearly from farmers coming from the emerging economies.

Negative externalities in tobacco production are: ground water pollution from fertilizer use, deforestation, food contamination and farm worker exposure to toxic chemicals from pesticide use, water and energy use, and fires caused by cigarette smoking. A positive externality is also produced such as social cost that includes income benefits to agriculture, farmers and families and competitive advantage of production of emerging countries. The second process in cigarette and tobacco production is the manufacturing process done through 50 factories in 41 countries.

Once the processed leaf arrives at the factory, it is checked for quality and blending, and the rest of the activity are fully automated and no longer done by hand. Quality control is top priority and tracking of production is done by computers (BAT). As new technology is introduced in the manufacturing process, reduction of employment is necessary and some machines are rendered obsolete. Negative externality produced in the manufacturing is the loss of income due to cost reduction of the company and the cost of machines that have to be destroyed.

Policy of BAT is to destroy old machines to prohibit counterfeit of cigarettes. 3. How does government try to control externalities? Government tries to control externalities of tobacco and cigarette consumption thru policies and regulations. Government uses production taxes, consumption taxes, restriction, quota and subsidies to agricultural products. The government is often called upon to intervene in the market to resolve externality problems. Government agencies such as the Environmental Protection Agency are established to set and enforce air quality standards, and taxes are imposed to obtain fund to pay for external costs or subsidize external benefits.

The United States has imposed an increase of excise tax that took effect July, 2010, with some states charging low, and others too high (NCSL, 2010). 4. Are the externalities controlled effectively? Are there other ways other externality could be? controlled. Under an unregulated market where there is no control, firms maximize their profits, but subsequent problems arise due to externalities. Under this condition, government intervention is needed to bring back