Why Is Tax The Most Effective Way In Internalizing Negative Externality

Discussion

Whether tax is the most effective way in internalizing negative externality In the competitive market have a large number of producers compete with each other to satisfy. No one can individually determine the price of the goods and service and how much they would be exchange. A negative externality on production occurs when the production of a good or service imposes a cost on third parties who are not involved in the production or consumption of the product. Pollution is a common example of a negative externality on production, since pollution by a factory imposes a (non-monetary) cost on many people who otherwise have nothing to do with the market for the product that the factory creates. Taxes on negative externalities are intended

For example, a steel producing firm might pump pollutants into the air. While the firm has to pay for electricity, materials, etc., the individuals living around the factory will pay for the pollution since it will cause them to have higher medical expenses, poorer quality of life, reduced aesthetic appeal of the air, etc. Thus the production of steel by the firm has a negative cost to the people surrounding the factory a cost that the steel firm doesn't have to pay. The production of smoke from factories may create clean-up costs to reduce air pollution by nearby residents. The building of a dam that prevents the fish from swimming upstream thus destroys the fishing industry in towns upstream. Note that if the fishermen are compensated by the dam builders for the full value of their loss, then no negative externality

It has a Coase Theorem that can solve the problem. The Coase Theorem is the way that the government gives a right to firm or consumer to use the resources. The one who have right to use can do everything in the resource If firm produce a negative externalities such as the example in the class the villager can solve the problem by ask the firm how much do you want to stop produce the negative externalities in case of they can deal each other. This way has a lot of advantage but you can deal with only 2 group of people. If they have a lot of people you can use the Coase Theorem. It’s not effective and it waste your time and use a lot of money to make it deal. Although it will has a many way to solve the problem about the negative externalities I think the best way to solve the problem should use the corrective tax because under perfect competition, once government has assigned clearly defined property rights in contested resources and as long as transactions costs are negligible, private parties that generate or are affected by externalities will negotiate voluntary agreements that lead to the socially optimal resource allocation and output mix regardless of how the property rights are assigned" This’s from => (Ronald H. Coase, "The Problem of Social Cost," The Journal of Law and Economics, October 1960). And it can solve the problem