Policies to reduce negative externalities - Essay Example

Policies to reduce negative externalities The first policy that can be taken to correct the negative externality arising from a local plant’s emissions centers on imposition of Pigouvian tax. Such a tax is levied in order to make the markets achieve optimum performance and correct negative externalities. Also such a tax tries to compensate the situation where the cost to the society is more than the cost to the producer. This tax will ensure that the producer bear the full burden of the market decision taken by him.

Such a tax might urge the plant to reduce its production or improve methods to contain pollution which might involve technological upgradation. Hence in case of such a policy the company bears the cost. This policy was practiced earlier with success but later replaced by pollution rights which ensure that the firm does not lose profits but can trade their pollution rights. However in such cases the gains to the environment is not much compared to the effect it has on minimizing cost to the firms.

This policy has worked in case of Kyoto Protocol where the carbon taxes imposed is targeted at the producer causing the negative externality. Such taxes on emissions also encourage the development of alternative and renewable energy sectors. Also when a large organization is forced to cut down production it gives relief to the smaller organizations from a competitive pressure. Hence this tax can also help in bringing about a balance in the market to reduce inequalities. (Hackett 2001) The second policy that the company can adopt is that of setting caps and baselines.

Setting baselines level suggests that the firm will not have the right to emit above that level. If this is too low then it will be unlikely for the firm to maintain the standard and if it is too high it will be easy for the firm to meet the benchmark and this will not ultimately solve the problem. These baselines can be imposed on the basis of a target for reduction which was decided by the authorities. A different kind of trading was brought into effect and this was known as allowance trading which allowed a certain amount of allowances to be auctioned off to the firms who have crossed the baseline.

The rights of allowances were also sold off by firms with lower level of emissions to the ones with higher levels. When allowances are auctioned to the firm the latter has to bear the cost which again acts as a disincentive to produce commodities that lead to such emissions. Also this hardly solved the problem because the new entrants were given the same allowances as the old ones and the total volume of the emissions increased. In case of an individual plant in a certain locality this could be a solution but if a new entrant comes in then similar privilege got to be given to the firm unless new entrants are banned.

Baselines were basically introduced as an alternative to allowances. In USA a certain process of cleaning up was organized to clear certain places of volatile organic compounds (VOC) in the atmosphere of the areas marked as non-attainment ones. Instead of allotting permits it was more conducive to allocate shares of a firm in the total pollution of the area. (Beder 2001) When the plant has to buy this permit it will automatically have to bear the cost and hence take care to keep the emission level below the benchmark set.

This might induce the firm to install technological efficient production tools which would emit less pollutant. References Beder, S. (2001) 'Trading the Earth: The politics behind tradeable pollution rights', Environmental Liability, (9)2, 2001, pp. 152-160, Retrieved on May 23, 2011 from: http://www.uow.edu.au/~sharonb/liability.html Hackett, S.C. (2001), Environmental and natural resources economics, M.E. Sharpe