Comments due by September 23, 2018
Externalities are unintentional side effects of an activity affecting people other than those directly involved in the activity. A negative externality is one that creates side effects that could be harmful to either the general public directly or through the environment. An example would be a factory that pollutes as a result of its production process. This pollution may pose health risks for nearby residents or degrade the quality of the air or water. Either way, the owner of the factory does not directly pay the additional cost to address any health issues or to help maintain the cleanliness of the air or water. In some cases, however, the harmed parties can use legal measures to receive compensation for damages.
A positive externality, on the other hand, is an unpaid benefit that extends beyond those directly initiating the activity. One example would be a neighborhood resident who creates a private garden, the aesthetic beauty of which benefits other people in the community. Also, when a group voluntarily chooses to create a benefit, such as a community park, others may benefit without contributing to the project. Any individuals or groups that gain additional benefits without contributing are known as “free riders“.
Traditionally, both negative and positive externalities are considered to be forms of market failure – when a free market does not allocate resources efficiently. Arthur Pigou, a British economist best known for his work in welfare economics, argued that the existence of externalities justified government intervention through legislation or regulation. Pigou supported taxes to discourage activities that created harmful effects and subsidies for those creating benefits to further encourage those activities. These are now known as Pigovian taxes and subsidies.
Many economists believe that placing Pigovian taxes on pollution is a much more efficient way of dealing with pollution as an externality than government-imposed regulatory standards. Taxes leave the decision of how to deal with pollution to individual sources by assessing a fee or “tax” on the amount of pollution that is generated. Therefore, in theory, a source that is looking to maximize its profit will reduce, or control, their pollution emissions whenever it is cheaper to do so.
Other economists believe that the most efficient solution to externalities is to include them in the cost for those engaged in the activity. Thus, the externality is “internalized.” Under this framework, externalities are not necessarily market failures, which weakens the case for government intervention. Many externalities (pollution, free rider benefits) can be internalized through the creation of well-defined property rights. Through much of his work, economist Ronald Coase showed that taxes and subsidies were typically not necessary as long as the parties involved could strike a voluntary bargain. According to Coase’s theorem, it does not matter who has ownership, so long as property rights exist and free trade is possible.
Two methods of controlling negative externalities loosely related to property rights include cap and trade and individual transferable quotas (ITQs). The cap and trade approach sets a maximum amount of emissions for a group of sources over a specific time period. The various sources are then given emissions allowances which can be traded, bought or sold, or banked for future use, but – over the course of the specified period of time – overall emissions will not exceed the amount of the cap and may even decline. Therefore, individual sources, or facilities, can determine their level of production and/or the application of pollution reduction technologies or the purchase of additional allowances.
Individual transferable quotas (ITQs) are a market-based solution often associated with fisheries management. Regulators first determine a total annual catch that will preserve the health of the ecosystem, and then it is divided into individual quotas to prevent overfishing. Each ITQ allows for a certain amount of fish to be caught in any given year and they are transferable, which allows fishing vessel owners to buy and sell their quotas depending on how much they want to catch. The goal is to create a commercial fishing industry that is both more stable and profitable.
The options for dealing with externalities – positive or negative – are numerous, and often depend on the type of externality. The key is to identify the particular tool or policy alternative that will best move the market toward the most efficient allocation of resource
The concept of externalities is often disregarded by both people and corporations in their daily actions. However, it is important to remember that all actions can have consequences and when it comes to the environment, these consequences need to be closely managed in order to prevent further damage. I believe that the most effective method of managing externalities is through a combination of cap and trade and through internalizing the cost of the externality. This way, industries have both an incentive to reduce their negative externalities as well as to efficiently use the allowance that they have.
ReplyDelete- Alexandra Zelcer
The concept of ITQs is an interesting idea to me. Especialy when it comes to polution and how some goverments are using/introducting them. I find it fasinating that these quotas are being used to reduce our polution footprint and to improve our planet's state
ReplyDeleteThere are people who live by a “zero waste” policy, use solar panels to generate electricity, and use appliances that are energy efficient. There are also people that refuse to believe it is necessary to recycle, or that global warming even exists. Unfortunately, neither of these people will be affected by their actions whether they are good or bad. This could be an example of market failure.
ReplyDeleteI do believe that the Pigovian taxes or ITQ’s would be an efficient way to prevent excess pollution created by factories, and force them to consider more environmentally friendly practices.
-Almira Ardolic
When learning about externalities, we are learning that the effects of our actions (even when they are not purposefully done to produce a certain cause) always have a cause, and can sometimes directly affect others. Whether these affects are positive or negative, they can affect other’s well-beings. When debating solutions to externalities regarding pollution, I believe that those engaged most with the activity should pay the most fees. Therefore, if the cap and trade approach were adopted by all, the amount traded, bought, and sold will be a direct correlation between the uses of emissions for each company. Also with the cap and trade approach, the government has the access to limit the amount of natural resources that will be used by these companies- with the aim to also limit the amount of externalities.
ReplyDelete-Alaina White
Externalities are an economic concept that essentially demonstrate how our actions have consequences. We cover this in introductory economics classes and it comes up consistently as we go through higher level classes. However, up to this point, I never learned about different ways to combat externalities. ITQ's is an extremely creative way to deal with this issue. I feel like this method is a good way to limit the use of resources or pollution because it allows people to pay for the direct amount of resources they are consuming or pollution they are causing. If demand goes up, the market price of the resources or allowance of pollution will increase eventually discouraging people from buying into this activity.
ReplyDeleteEveryone has touched base on the fact that not a lot of people understand that their actions have reactions and I think this is probably the most important segment of economics. As we read through the previous text, the GDP does not show us the whole picture so when it comes to externalities. I feel that people need to be aware of these. I was recently talking to my friends about how a lot of people hate on vegans/vegetarians and state that it does not matter that they are eating meat as they only live once. To me this idea sounds absurd because they do not see the domino effect behind walls of the meat industry. This calculated as externalities can teach people about their footprint that follows them. The cap and trade can come into play when it comes to this industry and maybe those that are taking part in the meat industry can feel the effect.
ReplyDeleteMarta Krawczynski
I think positive externalities is the solution we should emphasize and aim for. However, in some cases, I can understand that the negative ones are a must. Positive externalities would be good because it creates a positive circular flow of the money. For example, if there is a subsidy for companies to buy their employees corporate electrical cars instead of corporate diesel cars, it will create an incentive for the company to do this, they would be environmentally responsible, the employees will be happy, the car manufacturer will get higher sales which will increase their resources to develop better and more innovative electric cars, and the government is happy with less pollution.
ReplyDeleteSometimes negative externalities may be the only option but should be avoided as much as it can. An example of why negative externalities should be avoided is if a company gets a tax fee on every corporate diesel car they buy for their employees. This creates a discouragement for the company to buy cars but does not necessarily encourage them to buy electric cars. This may instead lead to the company not buying cars at all, or going for another option. And if they would buy a diesel car anyway, I really doubt that the tax that the government receives goes straight to the fund for developing of better and more innovative electric cars.
Now, the book and this article by the professor focuses more on land and production/farming. And I think this ties together with the first chapters about ecological economics. I think my theory would also work for these specific cases, but there is still a question of whether we can have less production on land alongside a thriving economy? I think we can, again with plant-based diets (needs less land to produce food, needs less water, pollutes less, no feces, and more), and if we have positive externalities, we can use those to develop more innovative solutions to the issue.
// Nils Erik Molin
Externalities are the cost or benefit that affects a party who did not choose to incur the
ReplyDeletecost or the benefit. There are two types of externalities positive and negative. Though, the
“positive” might not suggest it both are considered forms of market failure.This is because
resources were not allocated efficiently.
To combat the negative externalities the article provides two options. Cap and trade and
individual transferable quotas. I believe here will always be some form of “positive”
externalities.I agree with what Nils said about about positive externalities. We should look
towards those positive externalities for innovative solutions to correct market failure
Externalities are the cost or benefit that affects a party who did not choose to incur the
ReplyDeletecost or the benefit. There are two types of externalities positive and negative. Though, the
“positive” might not suggest it both are considered forms of market failure.This is because
resources were not allocated efficiently.
To combat the negative externalities the article provides two options. Cap and trade and
individual transferable quotas. I believe here will always be some form of “positive”
externalities.I agree with what Nils said about about positive externalities. We should look
towards those positive externalities for innovative solutions to correct market failure
Instead of viewing positive externalities as market failures, since they seem to positively impact communities, maybe we should use the theory of Pigovian taxes to create subsidy programs that could also benefit individuals in communities. For example, if one individual completely relies on public transportation, which is a more sustainable mode of transportation than using a car every day, that person could get a tax break on transportation or a government refund of some sort.
ReplyDeleteAlso, Pigovian taxes can benefit communities, too, especially if the governments imposing such taxes critically consider where profits from taxes are allocated. Currently, if someone buys a vehicle with a fuel-economy rating of less than 22.5 mpg, the IRS imposes a “Gas Guzzler Tax” on the vehicle’s consumer. Gas Guzzler taxes are usually assigned to luxury supercars including the 2017 Maserati GranTourismo convertible, the 2017 Lamborghini Aventador, and the 2017 Audi R8 to name a few. If the IRS collects Gas Guzzler taxes, then transfers the revenue from those tax collections to the EPA to reinvest into the environment and sustainability, this could help communities impacted by climate change. But, this idea isn’t perfect for a few reasons: 1) If someone purchased a 2017 Aston Martin Vanquish in NYC and had it transported to a foreign country, they would be polluting air in that country and that externality would be sort of unaccounted for (even though we know air pollution spreads around the world). 2) Only assigning a Gas Guzzler tax to the most inefficient cars (that are also the most high-end cars) does not fully discourage someone from buying a vehicle that pollutes. In addition, when someone is willing to spend $400,000-$500,000 on a car, the extra $3,000-$7,700 for the Gas Guzzler tax is most likely minor factor in buying that car. Perhaps it would make more sense for the tax to be determined based on amount paid for the car or the car’s value.
Hi Meredith,
DeleteI find your thoughts on positive externalities interesting. Pigovian taxes are used to correct an undesirable market activity, typically seen as a social cost of producing negative externalities. However, the idea of a rebate for someone/group that produces positive externalities could create an incentive to reduce total negative externality production across the board.
- Christine Lin
The article provided me with a very interesting look at externalities, both in a positive and negative way. Looking at this environmental economic concept that captures the notion of every action having consequences directly relates to the issues we see plague our world today. Companies with little or no understanding of how widespread their pollution of the environment tie in to what exactly is mention throughout the article. In looking at negative externalities that are attributed to major corporations who abuse the natural resources the only feasible solution would be the cap and trade method. This method would create incentives for corporations to limit their emissions and pollutions while also provided a way to manage the amount traded and sold as it ties into emissions use. The cap and trade approach also gives the government a preventative way to regulate the amount of natural resources used be each company. This method also limits the possible of market failure as a whole which is another positive side to the method in it of itself. “Cap and trade lets the market find the cheapest way to cut emissions.” (Nathaniel Keohane, Vice President, Global Climate)
ReplyDelete-Matt DeSantis
Daejaun Northover
ReplyDeletePositive externalities should always come with positive incentives because they enforce the idea that positive behavior deserves rewards. In this case, companies that benefit the environment while producing should be rewarded. It would help to send the message that preserving the environment is important and beneficial for everyone. Negative externalities should come with punishments. In order to stop a negative behavior there should be punishment. Higher taxes could be a punishment for companies with negative externalities that are too harmful. Cap and trade and individual transferable quotas are a good way to enforce the importance of positive externalities and negatives of negative externalities.
I belive that the additon of IQT's will benefit the economy postivitely. I'm not sure that many people will notice taxes being taken off for the waste or pollution they are creating. People seem to be in denial of the global warming that's occuring. There are so many people out there who are willing to reduce waste sources in their homes and save electricity and etc but than there are a numerous amount of people who don't apply these actions into their homes. There are people like that who exsist because one, they either don't understand the possibility of our environment collapsing or they they think that their change in behavior of being environmentaly friendly will not create any substantial change onto the earth or global warming. It's hard to identify to people the negatives that are occuring. These positive and negative externatlities might not make them understand it any better. But if there is a set regulations for a change in the environment that everyone has to apply too. Slowly, they will adapt and maybe finally they will see the change that they are creating and how helpful they are being for other humans, animals, and the earth itself.
ReplyDelete-Nicole Katsnelson
I think taxing sources of pollution is a much better way of motivating businesses to care about and do something about their amount of air pollution. Of course, the struggle is with convincing China who is the main contributor to pollution.
ReplyDeleteThough i had never given negative and positive externalities much thought, this post opened my eyes a bit and brought things into perspective. When thinking about negative and positive externalities, only negative ones come to mind. Food companies (the bad ones), who make billions a year selling us foods full of GMO are a prime example of negative externalities. These foods/snacks have a terrible effect on the general public. It causes things like disease, sickness, obesity, and even death. I 100% agree with Ronald Coase, he believes that the most efficient solution to externalities is to include them in the cost for those engaged in the activity. Its really a motivation factor for companies to perform at a higher ethic standard.
ReplyDelete- Alexis Burton
DeleteIn economics, externalities are the costs or benefits that affect a party who did not participate in the action. Since externalities are an indicator of market failure, economists often urge governments to adopt policies that “internalize” externalities. By internalizing externalities, the costs and benefits will mainly affect the parties who choose to incur them.
ReplyDeleteTwo common methods of internalizing negative externalities include cap and trade and individual transferable quotas (ITQs). Cap and trade limits the amount of emissions a group is allowed to release over a specific period of time. ITQs are one kine of catch share, which regulate fishing by setting a total allowable catch (TAC) per species over a specific period of time. This helps maintain a balanced ecosystem, which allows the fishing industry to be more stable and profitable.
- Christine Lin
Last semester I took an elective class called ‘The Naturalists’ with Professor Spillo. I highly recommend this class to anyone who still needs to fulfill an Area of Knowledge II. We spent a great deal of time talking about the effect of greenhouse gas pollution, which is arguably the biggest government failure with an externality. Greenhouse gas pollution has the potential to cause major global climate change. Furthermore, the pollution is not localized. The climate effects of carbon-based emissions are wide-spread and relatively slow.
ReplyDeleteSulfur dioxide is produced as a by-product of the burning of fossil fuels contaminated with sulfur compounds. This pollutant causes localized air pollution. Citizens living in polluted areas have a strong incentive to force the government to ‘do something’. In 1990, the United States government introduced a ‘cap and trade’ scheme to limit sulfur dioxide emissions. And the scheme worked. By putting a price on these pollutants, the scheme created significant incentives to reduce pollution.
Similarly, broad support and government action on greenhouse gases is most likely if there is a significant local problem. China is looking to limit its import of low-quality coal. But this policy is driven by the problems of local air pollution. It may lower global greenhouse emissions, but that is a side benefit of dealing with a local problem.
Global warming is a global negative externality, and, in my opinion, it is highly unlikely that governments in different countries will agree to an effective scheme to deal with this negative externality. Even if developed nations could reach an agreement, developing nations would be reluctant to join in.
There are no easy answers to dealing with global warming and given the poor history of governments dealing with localized externalities, I am pessimistic that they will put policies in place to deal with a global issue. Sadly, effective policies to deal with global warming are only likely to gain political support when the problem becomes too big for it to be ignored at the local level.
-Jennifer Torsiello
In the article, the author talks about the current situation and the future of the GPS tracking system. This article pointed out that there were a lot of progresses made in the GPS tracking software developing industry and the progress was estimated to continue in the future.
ReplyDeleteThis article is related to the industry I hope I will work in after I graduate from university, because GPS tracking software development is a pretty interesting and attracting industry for me.
In the next 10 years, I believe that GPS tracking system will continue evolving. For example, emergency call system might be implanted to the GPS tracking system, thus when people meet with accidents, emergency call system will be automatically triggered and the GPS tracking system can help police and hospital to locate the victim in a short amount of time. And this can definitely bring a lot of benefits to personal safety protection.
Link to my article: http://www.trackingtheworld.com/articles/the-future-of-gps-tracking-systems.php
xue ma
We all know the concept of a rational people, and people are self-interested. Therefore, everyone is willing to enjoy the positive externalities that others have brought us, but they are not willing to pay the price for the negative externalities that we bring to others. Such behavior can cause an inefficient state for society as a whole. So many times the government needs to come forward to correct this market failure.
ReplyDeletexue ma