10233803 Negative Externalities Market failure is known as the inefficient allocation of goods andservices in which there is an outcome in which one may profits but another oneincurs losses. Several problems are created in attaining the pareto optimalityand maximisation of social welfare.
The significant types of this marketfailures are public goods, monopoly power and negative externalities.This essaywill demonstrate how negative externalities are a form of market failure. Negativeexternalities can be defined as the cost of suffering by a third party as aresult of action taken by a producer and a consumer which is the first and thesecond party.
The examplesof negative are consumption of demerit goods like tobacco and drugs, Pollutionresulting from a thermal power plant, excessive use of pesticides and etc. A thermalpower plant fired by coal produces lots of electricity to power entire citiesbut comes at a cost of massive amounts of air pollution affecting the peopleliving near the plant adversely since they breathe air which is full of harmfulgreen-house gasses.The Paretolevel of efficiency is not attained. There are some nations like Sweden, Norway and Denmark which haveput a lot of effort in making lives of the people better but there is still alot more to do for most other nations. The welfare loss created by these plantsis massive and its solution can be compensating the people living around it.
Government’s intervention could of great assistance as well. Piguvian Tax canbe imposed in more polluting industries and incentives like subsidies to begiven to more eco-friendly industries. The government should impose tax in away which allows producers to attain a social marginal cost. This could reducethe output till the desired level. The government can regulate to produce goods only till optimum level bysetting up quota. The government can also ask pollutingindustries to compensate the people if they are being harmed by the industriesin any way. Carbon tax can be imposed on these industries and price ceiling andprice flooring taken up. People living in nearby locations should becompensated to move somewhere where there is a better quality of air and life.
Usage ofpesticides is another example of negative externalities. Chlordecone, a pesticidewas used in the Caribbean islands of Martinique and Guadeloupe France to killthe BANANA WEEVIL. It was legal at that time and it was used to increaseprofits and reducing costs for the plantation owners.Even thoughthe chemical benefited the farmers, it washed off the land into rivers thatflowed into the coasts where it damaged the freshwater prawn farms in themangrove swamps which were rich with lobsters and fisheries. The Fishermen’slives were affected adversely all those who ate the fishes fell ill.
The usage ofother methods to kill BANANA WEEVIL was more expensive than chlordecone and theprofitability for the farmers was in using the pesticides even though at thecost of other fishermen. The pesticide was proven to be harmful and thus bannedby various countries including France after some time.If peoplewere not able to bargain among each other and come to a settlement, the governmentcould step in and limit the usage of Weevokil pollution by reducing the amountof pesticide used. The production of banana was not the problem for thefishermen. The problem was the pesticide and so the government could haveimposed tax on the pesticide in way it is used less. The government could havealso asked the farmers to compensate for the losses of the fishermen whoselives were adversely affected. Building ofHydroelectric Dams is another example of negative externality. The costhydroelectric dams pose on the environment is tremendous.
Local animals and habitatsare destroyed. Dams have also resulted in flooding at many areas. Millions ofpeople have been displaced across the world due to the construction of dams.The Plant life that is submerged in water ultimately results in the productiongreenhouse gasses like methane.Despite ofall these negative effects of Hydroelectric dams, they provide us withcontinuous electricity which is essential for our day to day lives.Thegovernment can opt for other methods for producing electricity.
The government shouldalso compensate the people who would be displaced by the construction of thedam by providing them sources of income and housing at a different location. The usage ofantibiotics has also resulted to an external effect that is negative. Since itsdiscovery in 1928, Antibiotics have saved millions of lives. Fatal diseases arenow treated easily. They are also very cheap to produce due to mass production.However, the excess and improper use of antibiotics has led to a postantibiotic era in which the bacteria are becoming resistant to currentantibiotics due to which we will much more than we are presently saving and theimplications will be devastating. This is an example of social dilemma in whichsomething done by an individual in order to obtain his or her own objectivesresults into something harmful for someone else. The birth of antibioticresistant superbug is a negative externality which can be cured by severalactions which will be discussed later on.
Throughthese examples we can observe that welfare loss has been created for thesociety and the government has the authority and potential to minimise thesocial welfare loss. The Pareto efficiency has not been attained in theseexamples. The governments intervention is necessary However fordeveloping nations like India and Brazil, it is important to opt for cheapermethods of production in the short run in order to have enough funds for futurein which they could opt for more ecological methods of production. A coal firedplant used for producing electricity is considered cheaper for countries withtremendous amounts of coal despite of the future costs which are along with it