[Economics]
There is a significant difference between private and social costs. Private costs include the costs the company spends on buying capital equipment, purchasing sources and materials, utilities, hiring employers and others. These costs are paid by an entrepreneurship and are included in the process of production of goods and services. In addition, there is such a term called “external costs” which are never displayed in the statement of income, no matter who pays for them. For instance, a firm decided to save money by not installing a proper equipment to prevent air pollution. As a result, publicity have to pay additionally to keep our air clean. Meanwhile, social costs are determined by summing private costs and external costs. These costs take place when a firm transfers its external costs to the society.
A negative externality is extremely harmful to the society. As it is aforementioned in case 1, external costs occur when a company decided to avoid additional costs and impose them on the publicity. Yes, indeed, firms will benefit from this by saving money, but the negative externalities make social costs to enlarge. Thus, entrepreneurs decrease their marginal costs, but this will affect negatively on the market economy, because sources are not used efficiently at all. The solution to this problem is as follows: government must put pressure on such cheating companies and enhance taxation on the amount of a negative externality. This is believed to be one of the most efficient methods to influence on them and use sources efficiently.
The externalities usually take place where property rights over sources are undefined or are uncertain. For instance, nobody owns rivers and lakes, that simply means that firms may pollute without any responsibility for that. This opinion is often raised and argued in the society and mass media as well. In order to let the market economy develop properly, there must be a strict allocation of property rights. So, if a firm has property rights on the source, it could easily be taken to the court in case if something goes wrong. However, we cannot use this approach to solve the problem of CO2 emission. What I strongly recommend in this case is to not only to apply the fines to such companies which pollute our air, but also to strengthen control and implement constant surveillance. As an option, the government can also use progressive taxation system: the more CO2 emitted into the air the more tax you pay.
A Pigovian tax is a unique type of tax levied on the activity of companies in market economy who produce negative externalities. In order to deal with this problem, the authorities should basically charge a tax equal to the amount of an externality. A Pigovian tax has a row of critics from the economists: the amount of damage to the environment is hardly to count; even though companies pay this Pigovian tax, the environment still remains polluted, etc. Though this tax is widely spread around the world in countries such as The United States, England, Germany, Japan and proved to be one of the most efficient ways to reduce negative externalities, I personally think that it is not. To my mind, the implementation of this tax will never affect positively on our environment. I am of opinion that it does not matter how much money the budget will receive from this tax, we must realize that money does not talk when the issue comes the pollution and human health. The problem of pollution is warning us and can tremendously result in a disaster in the near future.
One of the alternatives to Pigovian tax is emission charges. This means that a state sets up a certain price / per unit of pollution. It is similar to progressive taxation system: the more quantity of the pollution is produced by the company, the more charges it pays. Emission charges are widely spread in the European Union. For example, in the Netherlands, Germany and France exist a waste disposal charge for water polluters. However, instead of emission charges and Pigovian tax there is also such kind of thing as marketable permits (or permited pollution limit). What does it mean? The state gives permission to produce a certain amount of pollution, and companies can sell or purchase them. The price meets its market average level. A company buys a permit in case it has high marginal expenses of decreasing pollution. However, if marginal costs are low, the company will buy them. As for now, the price of such permits to contaminate is going up and the demand for them is rising as well.
