It is not feasible to eliminate all pollution, nor is pollution purely a problem of industrial societies. The issue for economists is how to reach the optimal level of pollution as there is distortion interfering with the working of what is known as the ‘invisible hand’ (markets automatically channeling self- interest toward socially desirable ends). What must be discussed is the importance of government intervention and the notion of externalities caused by pollution.
External costs produce one type of market failure and that market failure leads to inefficiency in the allocation of resources. Society has to pollute at a reasonable level. We should not pollute past the assimilative capacity of the resources unless we find a technology that will clean up the pollutants. This can be extremely expensive; therefore, society must pollute at a quantity at which its total benefits exceed its total costs by the greatest amount possible. This occurs at a level where the marginal benefit of an additional unit of pollution equals its marginal cost.
Marginal benefit refers to what people are willing to give up in order to obtain one more unit of a good, while marginal cost refers to the value of what is given up in order to produce that additional unit. Additional units of a good should e produced as long as marginal benefit exceeds marginal cost. In the above graph, we can see that where the marginal social benefit (MS) is equal to the marginal social cost (MASC.) of environmental quality, we have an efficient level of pollution, Q*.
This is the point after which the cost of an additional unit of pollution prevention exceeds the benefits to society derived from that additional unit of pollution prevention. For all units of pollution prevention from zero to Q*, the benefits derived from a one-unit increase in environmental quality exceed the costs. When companies (and individuals) ho pollute do not bear the full costs of their pollution, their marginal private cost (cost of one more unit of environmental quality) is lower than that of society. As the level of pollution prevented goes up (move right in diagram), the marginal cost increases.
This is because eliminating small to medium amounts of pollution may be relatively easy, but total elimination of pollution would cost considerably more. The marginal benefits curve also decreases at an increasing rate (moving to the right) showing that a small pollution reduction will be felt less if the environment is good, rather than if the environment is poor. When a company pollutes, it produces what economists call a negative externalities. This means that society has been negatively affected by the polluter (e. G. Health risks or sore throats etc).
This means that due to the externalities, the social cost of producing the good exceeds the private cost. The socially desirable quantity of the good Captious is therefore smaller than the equilibrium quantity Smarter. Without some type of regulation, companies will not take all marginal social costs into account and will produce at a level that is damaging to the environment. The difference between these two curves reflects the cost of pollution emitted. This can be demonstrated in the diagram below. To achieve maximum economic efficiency, government intervention must exist.
In an unregulated market, producers don’t bear the cost of the pollution which means they have no incentive to prevent it and the costs are passed on to society. This means producers have lower marginal costs than they would otherwise have and the supply curve is effectively shifted down (to the right). This results in both an inefficiently high level of production and an inefficiently low level of pollution control. A solution to this inefficiency is direct regulation whereby the government tells the company how much it is allowed to pollute.
This is known as a pollution permit – the Government give out the legal right to admit carbon to the atmosphere. Another solution is known as the command and control strategy -? whereby detailed regulation of technology leaves polluters little choice in how to achieve the environmental goals. One other policy which is seen to be the most efficient, is imposing emission fees known by economists as a Poisoning tax. Ender a system of Poisoning taxes, the government charges for the damage done by polluting. By doing so it converts the external cost into an internal cost (internalizes the externalities).
According to the article “Equilibrium Pollution and Economic Development in China” there is one such levy system in place whereby it formally requires that a fee be paid by any enterprise whose effluent charge exceeds the legal standard. This has been proven in the article to be an effective way of regulating pollution. This implementation Of the tax can be shown in the diagram below. If we consider this supply and demand diagram prior to Government intervention (red line), the market leads to equilibrium price and quantity (Pl , IQ ) determined at the intersection of the supply (or MAC) and demand curve.
Due to the production of Q, pollution is generated which can be measured as marginal external cost (MACE). This means that the full costs to society (marginal social cost curve) is equal to MACE + MAC. Thus, the external costs of IQ are equal to the area c+d+e+f+g+h. If companies face a pollution tax whereby production costs are equivalent to the MASC. then the new market equilibrium will be (PA, Q) – The market now has a higher price and lower quantity. This tax generates revenue for the Government (b+c+f) and in turn finances the costs of public goods and many other things which are beneficial to society.
Implementing such a tax causes a deadweight loss – the reduction in total surplus (d+g). However, the avoided externalities is equal to d+e+g, which means the benefit of the environmental regulation is apparent and the deadweight loss is internalizes. So in other words, the tax causes supply to rise – as a result the quantity consumed tends to decrease as the costs are Geiger for the purchaser. But the price received by the producer is lower than it was before, as the tax is paid to the government. The environmental cost is then shared between the producer and the consumer of the good.
The opinion of an Economist from the Melbourne Institute of Applied Economic and Social Research should be duly noted when discussing a Government policy in relation to the environmental outcomes of pollution; ‘To many, the key issue of concern in the climate change debate is that of securing a workable global environmental agreement, rather than specific concerns over sign of a carbon tax.. ” (Harry Clarke, 2011 As a consequence of companies producing their product, pollution is emitted into the atmosphere which has become a global problem.
Poisoning taxes seek to address the global costs associated with carbon emissions. They have significant effects on markets for goods which utilize carbon-intensive inputs and on markets for these inputs themselves, as well as for substitute and complementary inputs. As long as externalities exist and are not internalized via Poisoning taxes, the result is inefficient. The inefficiency is eliminated by charging the polluter equal to the damage done by his pollution.
In some real world cases it may be difficult to measure the amount of the damage, but, provided that that problem can be solved, using Poisoning taxes to internalize externalities produces the efficient outcome necessary for all involved. Eliminating all pollution would cause a severe loss in the standard of living and be extremely costly if it were possible. Society needs to find the correct balance of polluting in order to have the marginal social cost equal the marginal social benefit to achieve maximum economic efficiency. References: