Negative Externality Examples

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Based on the news article from The New York Times, two rivers in Guangxi Zhuang region, China was polluted by a discharge of cadmium, detected early January this year. Tons of cadmium- the poisonous toxic metal which can cause kidney failure and bone damage, is accidentally been release into the river by Guangxi Jinhe Mining Company and Jinchengjiang Hongquan Lithopone Material Corporation in Hechi city which has fouled drinking water supplies for millions of people in Liuzhou. It is known that the spill has contaminated 200 miles of the LongJiang River for at least two weeks had kills 90,000 pounds of fish and millions of fry and several hundreds of villagers downstream had consumed the water for five days before gets notified by the officials. S + Tax P It is linked to a negative externality. Externality refers to the spillover effect to the third party from an activity whereby negative externality is external cost which is the cost suffered by someone who was not directly involved in an economic activity. Referring to above case study, the spill affects the villagers’ drinking water supply because it has been polluted by the responsible company. S=MPC MPC = Marginal Private Cost MPB = Marginal Private Benefit Pe Ps P1 D=MPB Q Qe MEC=Tax E1 E2 Qs Diagram 1 – Tax to overcome negative externality The market supply curve is MPC, the sum of all the firms’ marginal cost curves. But this curve is only the curve of all their private cost. The private efficiency is achieved where MPC=MPB at the equilibrium E1. If they considered the external cost such as cleaning up the river, their cost should be much higher. Therefore, the realistic supply curve should be shifted to the left since the cost has increased. Now, look into the case study. To overcome this problem of negative externality, China should impose tax, so that the company could reduce
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