Negative Externalities Essay

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Essay Describe the means by which to internalise the negative externality (if any) associated with emitting carbon into the atmosphere. A negative externality occurs when an exchange or transaction is made and the total cost of that transaction is not incurred by the parties involved in the transaction and the cost to society is greater than that the consumer pays. Negative externalities are a problem because the cost of emissions is greater than the cost to produce or buy. When carbon is emitted into the atmosphere it tents to hand around for a long period of time resulting in an increase in green house gasses causing an increase in radiative forcing. This causes the atmosphere to reflect heat back to earth and causes global temperatures to rise. Because of the costs associated with climate change, there are costs associated with carbon emissions, costs the firm does not have to pay. (Externalities n.d) (See figure 1.1) Whilst it is not feasible or economic for all carbon emitting activates to cease it is important to have methods of internalising the negative externalities to compensate the affected parties that did not benefit from the initial exchange.” To internalise a negative externality means to alter incentives so that people take into account the external effects of their actions.” (Gans, King,Mankiw 2010 p.204). Governments around the world have varied methods of internalising negative externalities. The three best means by which to internalise the negative externalities associated with emitting carbon into the atmosphere are a Pigovian tax, carbon emission regulations / quota and tradable pollution permits. Figure 1.1 SMC = MC + EXT [pic] The famous economist Milton Friedman said that the government should require companies to pay for the costs of cleaning up the problems they create. This can be accomplished through pollution
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