Government Intervention to correct externalities
Government
can use wide range of policies that it could use to bring an efficient
allocation of resources where externalities exist.
1)
Regulation: it is a method used by
government to control externalities. Methods like
a)
Government
could lay down maximum pollution levels.
b)
Government
could ban pollution creating activities.
For
instance: In the UK, the Environmental Protection Act 1989 laid down maximum
environmental standards for emission for more than 3500 factories involved in
chemical process, waste incineration and oil refining. Government banned
burning of ordinary coal in urban areas.
2)
Extending property rights: If a chemical company lorry
destroyed your home, you would expect the chemical company to pay compensation.
If the chemical company polluted air in atmosphere and the tree in your garden
died, it would be unlikely that you would gain compensation, particularly if
the chemical plant is in the UK and the dead trees were in Germany.
Externalities
often arise because property rights are not fully allocated. Nobody owns the
atmosphere, oceans, and rivers. Government can give water companies right to
charge companies polluting water which dump waste in sea and rivers. It can
give local residents the right to claim compensation if the pollution levels
are more than a certain amount.
·
However there are some problems for extending
property rights. If the polluter is in another country and sufferer is in
another country. For example. If Brazil is cutting its forest which will lead
to global warming and western countries are being affected. Western countries
can pay Brazil for not cutting down the forest.
·
Another example could be of asbestos sheet worker
who have the right to claim if his health is damaged working in the company due
to asbestos. Company will not pay him until it is clear that his health is
damaged due to asbestos. This could take longer time and the worker can even
die until his reports come.
·
If there is a tree in your garden and your friends
garden and the road contractor wants to cut down the roots coming out. You may
be having much value for the tree where as your friend may be fairly unaffected
by cutting down the trees root. Hence it is difficult to measure the exact cost
of the property.
3)
Taxes: Government can set extra taxes
on the externalities equal to the amount of externalities. This will result in
fall in demand and less will be produced causing less externalities. For
example government can impose tax on petrol equal to the amount which is
required to clear pollution it creates.
4)
Subsidies:
Assume government wants to control emissions of sulphur in to the
environment. It will issue permits to pollute. The total of which equals the
maximum amount of sulphur it wishes to be emitted for a period of time.
Diagram
to illustrate government intervention
·
In
the diagram, regulation fix output to V where externalities are less
·
Extending
property rights attempts to equal MPC & MSC by shifting
MPC upwards
·
Taxation
again helps to equal MPC & MSC. The tax should be
levied in such a way that at output V MPC
=MSC.
·
Permits
acts like regulation permitting pollution up to a level
where production limits to V
