Externalities in the Marketplace
Cindy Johnson
AIU

Abstract
This paper will discuss the concerns of correcting the effects of gases and particulates emitted by a local power plant and how the market activities have unintended positive or negative effects outside the market’s scope. These effects are referred to as externalities and therefore, will examine the cost and benefits of each action.

Externalities Externalities are generated when individuals impose costs on or provide benefits for others. They usually do not have an economic incentive to take those cost or benefits into account. This results in either a negative or a positive externality. A negative externality is generated when a particular side effect imposes a cost on others. A positive externality is a side effect that generates benefits for others. (Krugman, 2011).
There are many ways in which the government controls the amount of emissions and pollutants that are released, but the most two common ways they use is to tax the companies that are producing the pollutants. This is called the Pigouvian Tax. A Pigouvian Tax is a tax on external activities. These externalities are actions not taken into account by the acting party. For example, pollution is considered an external activity to many industrial processes; therefore, the government might impose a tax on polluters. (WordIQ, 2012).
Another way the government can control the amount of emissions is to directly tax the pollution. This is referred to as the standards-charge approach. The government will establish a level of pollution it believes is appropriate and will charge a fine to the company for each unit it is above the allotted amount. (Crandell, n.d.).
There are many benefits from reducing pollution, but the most notable are by reducing pollutants in our air, the environment would be much cleaner and ecosystems would be healthier by lowering the greenhouse gasses. In addition, the health of the individuals would benefit by having cleaner air to breath. The cost of reducing pollution will always result in some sort of loss involved, both to the government imposing fines and taxes and to the companies. If the taxes are levied, naturally companies will find ways to reduce costs by laying-off employees or by sending jobs elsewhere, for example, to a foreign country.

References

Crandall, R. (n.d.). Pollution controls. The Concise Encyclopedia of Economics. Retrieved from www.econlib.org.

Krugman & Wells. (2011). Microeconomics. (2nd. Ed). New York: Worth Publishers.

WordIQ. (2012). Pigouvian tax. Retrieved from www.wordiq.com.
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