Pure, Per Se and Natural Monopolies
The two policies that I have chosen to use are going to be a pollution tax and a regulation that will limit the amount of emission that any company will be allowed to release.
To say that it is a negative externality an activities social costs have to exceed the private costs that the decision maker has made. If this was to happen then the amount emitted without any attempt to get involved is going to be put at a specific level. To be at this level the private marginal cost is going to be equal to the private marginal benefit. Market flaws will show because the social marginal costs are going to be higher than the private marginal costs. In doing this the projected outcome is to persuade the local company to make the choice of an amount of emission that is going to be considered a socially optimal amount and in return will make any outcome the decision makers wants to obtain a result that will contribute to a solution.
To better find an outcome that is a solution to the emission of gases and particles in the air a pollution tax will contribute to this. Putting a tax on the emission of the local company will be the first step. Negative externality will be considered when deciding on a tax. The tax will have to be equal to the amount each unit will produce a negative externality. To use an example, 30 units of emissions are created from each unit and there are a total of 20 units. The 30 units of emissions cause $1.25 of harm to the community. The local company would then receive a corrective tax of $37.50 for each unit. The private marginal cost curve will equal to the social marginal cost curve and a socially optimal amount will be selected.
A regulation that will limit the amount of emission that any company will be allowed to release is a second policy that would resolve the issue. If the emissions go over the socially optimal amount then a law can be put in place to put a high penalty if the amount of emissions is exceeded.
There are benefits other than emission reduction with these two policies. Corrective taxes will provide the state government with additional revenue and this can in return be used for schools, parks and the states community improvements. The benefits of regulation will result in a cleaner environment.
The cost of the actions of corrective taxes is that the tax burden will increase for the companies. You could use elasticity of demand when looking at the costs. The consumers would notice an increase in prices and in return the amount of units sold or bought will drop. The jump in cost can also affect the amount of employees it will take on as new hires.
The problems that could come up are the high cost of actively watching an industry. An increase in state taxes to help fund these policies will have to be put in place. The level of emissions can be decided on by knowing the marginal benefit of emissions to the company and the marginal cost of emissions.
Tol, R. (n.d.). The Marginal Costs Of Carbon Dioxide Emissions: An Assessment Of The Uncertainties. Retrieved January 30, 2011
“Reducing our Emissions.” Union of Concerned Scientist. N.p., – . Web. 30 Jan. 2011.
“Emissions Solution suits diesel/gas engine applications.” Thomas Net News. N.p., – . Web. 30 Jan. 2011. .