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Perfect Competitive Markets and Allocating the Resources Fairly Across Sectors in the Economy - Research Paper Example

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The paper describes activities of businesses or individuals that affect the lives of people who live around them. It may also affect the natural environment in which the business or individual operates. The environment or people are affected either positively or negatively…
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Perfect Competitive Markets and Allocating the Resources Fairly Across Sectors in the Economy
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Download file to see previous pages According to Callahan (2004), the British economist Pigou played a major role in describing the theory of externalities. Negative externalities are costs or negative effects that spill over to the third parties because of the activities of other people or business entities. A third party is a person or entity that is not part of the activities or processes that goes on when the negative effects are generated. Negative externalities are factory emissions, noise pollutions and dumped wastes. A good example of a negative externality is a factory that dumps untreated wastes into the river or carbon emissions released by fuel engines. People who use the water downstream spend their money in cleaning the polluted water. Therefore, the cost of cleaning the water is a negative externality. Describe some of the ways to correct the negative externalities and the pros and cons of each method. Give examples. Governments apply various mechanisms to eliminate or reduce negative externalities. They include government taxations, criminalization of the polluting activity, government regulation through quotas and permits. The first mechanism used to reduce the negative externality is taxation. The government or local authority introduce taxes to the business or non-business entities responsible for producing pollutants that harm the environment and the people who live in it. Environmental taxes are the most powerful tool societies for reducing externalities and protecting human and environmental health. ...Download file to see next pagesRead More
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