Question

Describe and discuss how a negative externality internalized into a market. Your discussion must include how the optimal level of pollution is determined, the impact on price and quantity.

Answer 1

Negative externality is a consumption or production of goods which harms the third party. If we produce harmful chemicals and that causes pollution , the fishermans or the people who are depended on that ,it will have negative impact bon them. The loss of this will be negative externality. Whereas internalization of it means shifting the burden of it another party. Let's say people of specific area do pollution ,that causes harmful effects to them, but they do not pay the charges for it , Instead government pays the monetary charges. Though its very difficult to check how much pollution is done by whom, but there are some ways to tackle this problem. The optimal level pollution is decided at where the morginal benefit of pollution equals the marginal cost of the pollution. Pollution done production causes the changes in prices of commodities. It hikes the prices , followed by low supply.

Government should charge the producer's who contribute in negative externalities,“ making the polluter pay”. The collection of this tax could be used for the environment itself. In the end we are for environment ,environment is not for us.