Question

Negative externalities are production costs that are borne by third parties. In the classic example, such externalities are the effects of pollution caused by steel mills, chemical plants, etc. Of the many proposed taxation policies designed to penalize producers responsible for creating negative externalities, perhaps the most contentious is the "carbon tax". What are the arguments for and against a carbon tax? How would the tax affect the competitiveness of the exports of countries imposing such a tax? What steps would you take to ameliorate negative unintended consequences?

Answer 1

When it comes to reducing pollution across the world, it is evident that countries are taking serious measures to ensure that it can be curbed as much as possible.

Over the years, countries have taken numerous types of actions to ensure that Negative Externalities of pollution from steel mills, chemical plants and other types of manufacturing industries can be limited as much as possible.

One way of dealing with the situation is to apply a carbon tax on the total sale that these companies make. The positive to this is that it increases the cost of operations for the firm. Once that happens, firms are forced to move to other technologies which produce lesser emissions on one hand, and on the other, the taxes thus collected can be used to provide for renewable energy, research and lowering the pollution by engaging in likewise expenditure.

On the other hand, the core problem with carbon tax is the fact that all costs which the producers make are passed on to the end consumer which makes purchase of critical items such as steel and iron, chemicals etc expensive in the country for consumers.

The government then is stuck with two choices, whether to focus on maintaining inflation in the economy which is caused due to the rise in price of these goods, or to reduce negative externality of pollution which is bad for third parties and the economy alike.

In the export market, domestic companies become less attractive as buyers want the best cost products and taxes raise prices of exports even further.

To counter this, as a recommendation we could use the principle of providing subsidies to those companies that prefer to use unconventional methods and reduce their costs and increase their total production levels.

Replacing the industry with those companies that encourage sustainable development and lesser negative externalities can help the country in realizing its economic goal. These subsidies make sure that the exports can be maintained on one hand and companies are encouraged to reduce pollution on the other.

Please feel free to ask your doubts in the comments section.