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Externalities economic term: externality = occurance that while it does not monetarily affect supplier/producer, influences the

standard of living of society as a whole. +ve externality: benefits society. Producer cannot fully profit from this kind of gain. -ve externality: coss the producer nothing, but costly to society in general. Harmful emission from glue factory and steel mill classified as -ve externality. Cost producers/suppliers nothing, but affects society as a whole in a huge way. Companies do not lose money from this but society pays heftily because of this caused externality. Causes of -ve externalities: Companies do not properly measure the economic costs of their actions. Ended up in market inefficiency. Neither the market nor private companies can be counted on to prevent this unavoidable market inefficiency from happening. Hence this calls for governement interference. Governenment's goal : force companies to internalize externality costs. i.e. if company's pollution creates economic costs then the company will be forced to pay that cost by law. this way the company can accurately compare revenues and expenses, hence decide whether production is profitable. a) Direct Pollution Controls Most common gov regulation. Sets absolute leels of allowable polution. More severe measure, is banning, which is a common practice but has mixed effects. Biggest prob with DPC is that they are economically inefficient. Do not attempt to equate MSC = MSB. Polluters face varying costs in trying to reduce pollution. Simplification of standard pollution levels creates problems. Arises only in practice not in econ theory. Gov cannot monitor every factory/industry to ensure they comply. Difficulty of enforcing DPC reduces effectiveness. b) Tradable pollution permits. Free market solution to -ve externalities. Companies that pollute create a cost to society but not to themselves. No accurate view of cop, cnnot set production at level that max efficiency. Permits gov to give licences to pollute at certain level. Companies can buy, sell, and trade these permits on the market. In interests of company to pollute as little as possible. If higher pollution, have to buy permits from another company. Gov set a limit on how much pollution is allowed, then give permit to pollute at that level. Pollute less than allowed, can sell their permit. Rather than reduce pollution, TPP cause companies to simply bear the cost of polluting. Long run, companies will pollute heavily while some will not. End result: Some areas of the world highly pollutedand soem relatively clean. Difficult to measure pollution. However, is reasonably effective way to deal with prob created by externalties. c) Emission Taxes solution to the failure of freemarket caused by prob invoving -ve externalities. Sets an amt of tax for companies to pay for every unit of polution produced. Ideal tax rate would be exact social cost per unit of pollution. Adv: Successfully forces bussines to internalize -ve externality costs. Solves prob of econ inefficiency by allowing firms to maxprofits and pollute at most efficient level. Less cost is induced bhy eliminating same amt of pollution. Superior to DPC bc DPC is economically inefficient. Disadv: Gov must correctly calc the tax level to max econ efficiency. Require thorough analysis of all social costs caused by each unit of pollution. If the government knows how much pollution is produced per unit of production output, then the government can set a tax on production output that achieves the same results as an externality tax. In practice, however, the relationship between pollution and production output is often very difficult to estimate with any degree of precision.

Not easy t measure how much company is polluting. Which makes regulating polution levels a difficult task. .Generally a final prob occurs for all pollution regulations.