Question

This is a written assignment that you must conduct exploratory research on how the government internalizes negative externality (you only need one market or one product or one activity).

Recall negative externalities occur in many markets; for example, oil production, manufacturing, transportation, and smoking, etc.

Please make sure that:

1. You clearly identify the market (product or activity) that causes negative externalities, which means the negative externalities must be also well defined. These could be shown with good statistics and proper in-text citations (and references.)

2. You are to write a summary of the policy implemented in the market of your choice. Again, properly if you use any direct quotes or statistics from the sources, you must cite the sources properly.

3. You then will upload your short exploratory paper in a word document or pdf file to Canvas.

The research should not exceed 2 pages (double-spacing), excluding the abstract and reference page, and you must have at least two outside sources for your writing.  A successful paper requires you to perform research, craft an argument, and cite references to support your statements. I might ask for you to show me the sources you use, so please have them available.  

Answer 1

Answer:

Brief Outline:

1. Negative externalities is a negative indirect costs that are incurred by third party. Third party are members that are not involved in the direct transaction but face external costs due to the production or consumption of a good. Let us take the example of leather tanneries. Leather tanneries are usually situated near river banks, and these tanneries usually discard all chemicals and waste in water bodies. Now, how does this impose external costs? Notice, that this affects the environment as it contaminates clean water and puts marine life at risk. It also prevents people from using this clean water, affecting the livelihoods of people who are dependent on this river. In addition these tanneries release chromium which makes it way into air and soil, affecting several living conditions. For instance, tanneries in Agra caused the marble of the Taj Mahal to turn into smoky gray. Thus this is an example of negative production externality.

2. The Government intervenes in the case of negative externalities by taxing the producers. A per unit tax or a carbon tax, discourages producers from emitting harmful chemicals into the environment, because the cost of emission is now higher. In addition, the Government can issue tradable permits, where they put a cap on total emissions. Suppose, the Government permits all leather tanneries to emit a total of 100 tonnes of chromium. Let us say there are 5 tanneries, and each are permitted to emit 20 tonnes each. Thus, all firms have to decide how much to emit such that total emission remains to 100 tonnes. The firms/tanneries which are able to emit less than 20 tonnes, will sell their extra permits to firms that maybe are unable to meet the cap of 20 tonnes. Through this, the total emission remains at 100 however within the firms, the emission can vary.