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Tax aluminum producers for each ton of aluminum sold Internalizing the externally: altering incentives so that people take account of external effects Of their actions Positive Externalities Ex: education Education mainly private: consumer of education becomes more productive worker, reaps benefit in form of higher wages Positive externalities from education include: More informed voters ; better government for everyone Lower crime rates Development and dissemination of technological advances D higher productivity and wages Summarize Negative externalities lead markets to produce larger quantity than is socially desirable Positive externalities lead markets to produce smaller quantity than s socially desirable Remedy the problem: gobo can internalize the externalities by taxing goods with negative externalities and subsidizing goods With positive externalities Public Policies Toward Externalities Command-and-Control Policies: Regulation Can regulate by making behaviors required or forbidden Ex: crime to dump poisonous chemicals into the water supply Ex: can dictate Max level of pollution that factory may emit Market-Based Policy 1: Corrective Taxes and Subsidies Can use market-based policies to align private incentives with social efficiency
Gobo can internalize externalities by taxing activities that have negative externalities & subsidizing activities that have positive externalities Corrective taxes (aka Opposing taxes): taxes enacted to deal with the effects of negative externalities Ideal corrective tax would equal external cost from an activity with negative externalities Idea corrective subsidy would equal external benefit from an activity with positive externalities Corrective taxes alter incentives to account for the presence of externalities and move allocation of resources closer to the social optimum While corrective taxes raise revenue or the covet, they also enhance economic efficiency Market-Based policy 2: Treatable Pollution Permits Objections to the Economic Analysis of Pollution Rich countries can afford cleaner environment than poor ones, and therefore usually have more rigorous environmental protection Clean air and clean water obey law of demand: lower price environmental protection, the more the public will want Economic approach of using pollution permits and corrective taxes reduces cost of environmental protection and should, therefore, increase the publics demand for a clean environment Private
Solutions to Externalities Types of Private Solutions Solved with moral codes and social sanctions Don’t litter because just not right Charities Sierra Club: goal to protect environment, nonprofit organization funded with private donations Rely on self-interest of relevant parties Solution takes form of integrating different types of businesses Interested parties to enter into contract The Cease Theorem Cease theorem: proposition that private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on heir own Private market will reach the efficient outcome on its own Overall: says private economic actors can potentially solve the problem of externalities among themselves.