How the government can Influence Positive and Negative Externalities.

How the government can Influence Positive and Negative Externalities.

Externalities arise in an economy once the consumption or production of a particular service or goods influences a third party who is not linked directly to the consumption or production of that product or service (Cornes, 1986). Externalities are overspill benefits and costs. When an expense spills over, a negative externality arises. If a profit spills over, a beneficial externality arises. Thus, externalities occur when the transaction’s costs or benefits fall on someone who is not the manufacturer or the buyer.

Negative Externalities

Over the past several weeks, a town with one of Parkruns ‘largest populations, Canberra, has gone without people. So dense and unhealthy was the pollution coming in from bush fires nationally that two of the eight Parkruns in Canberra and neighboring Queanbeyan were deserted for some time. There existed an impact on the economy as well. Individuals were expected to go to a coffee shop after each Parkrun to have a coffee or a slice of banana pie. The smoke resulted in several small enterprises going out for four weeks. This is an instance of the negative externality effect (Wright, 2020). From an economic point of view, the company is pivoting some of its manufacturing costs to society. The company uses cleaner air in its manufacturing process — a tool it does not reimburse for — and releases toxic air to the environment, which poses a possible health risk for those breathing it. If the company paid the full manufacturing expense, it would bring clean air back into the environment. If the community wants fresh air, then the community has to pay to clean it up. For this situation, pollution reflects the transfer of some of the production costs to the community, a negative externality.

Correcting Negative Externalities

The government can play a significant part in mitigating negative externalities through taxing products as it creates spillover costs from their output. This taxation significantly raises the manufacturing costs for these products (Laffont, 2008). The increased expense, then, best represents the actual manufacturing cost as it covers the expense of, perhaps, pollution spillover. Such taxation seeks to make the manufacturer responsible for the entire output expense. For instance, on January 1, 2018, federal environmental tax policy was introduced by the Chinese administration, permanently eliminating the contaminant pollution fee which had been in place over the last four decades. The Environmental Protection Tax implied the start of several other new measures aimed at reducing China’s pollutants, which would inevitably impact companies, mainly processing companies, although in different ways (Cicenia, 2018). The economic theory is built through primary hypotheses on how human beings act, tackle the question of scarcity and react to change (Mankiw, 2017). Scarcity pertains to the fundamental economic issue, the disparity around minimal resources, and technically unlimited wills. This situation demands individuals to make choices about how to productively apportion resources to meet fundamental requirements and as many other requirements as conceivable. The government employed the tax to drive up the manufacturing cost to curb the negative externalities. This tax altered the equation of the customer choice, and they sort other alternatives that they’d never normally consider; it is because the state has foreclosed an option they always had and preferred to other choices that are present after the increase in taxes. This will lower the purchases of the goods by the customer and hence reduce its production. The higher taxes would also result in higher manufacturing costs forcing the company to choose lowering its manufacturing, thereby lowering emission rates.

Positive Externalities

People get a private profit when they acquire education. But there are advantages for the rest of the community as well. The many benefits of your schooling usually spill over to the community. To put it another way, you create positive externalities. For instance, more schooling contributes to increased productivity for the employee and improved standards of living for the community at large. While education has several spillover benefits, educational facilities are not getting all the profit they would gain if the transaction’s real benefits were entirely accepted. Simply put, educational producers are not adequately paid for the rewards that go through society. Consequently, educational producers might under produce education.
Encouraging Positive Externalities

By offering subsidies for services and products that produce spillover benefits, the government may play a vital role in promoting positive externalities. A state subsidy is a benefit that indirectly reduces the expense of a product or service being generated (Laffont, 2008). These subsidies supply companies with an incentive to improve the production of services or goods, resulting in positive externalities. Since the spillover profits go to the community, federal subsidies are a means for the community to share the expense of creating positive externalities. Concerning economic theory, regarding education, the scarcity of income earned by educational providers contributes to lower production of education in communities (Mankiw, 2015). This circumstance pushes the government to agree to increase its subsidiaries to improve and maintain the development of education and thus increase its benefits for society. For example, as part of a national multimillion-dollar plan, Many of Victoria’s top learners will be included in intensive programs to support high-achieving kids participate and succeed. $40 million will be granted to public schools to compensate for resources to facilitate education. The institutions will also receive a $1.2 million infusion of funds that will provide continuing education and training for teachers (Ilanbey and Carey, 2019). These policies will improve education in Victoria by increasing the number of Victorian pupils in NAPLAN outcomes in the top two assessment categories.

Ultimately, by taxing services and goods that create spillover expenses, the state can deter negative externalities. Through subsidizing products and services that produce spillover advantages, the government will promote positive externalities.

References

Cicenia, A. (2018). China’s Environmental Protection Tax. China Briefing. Accessed on April 1, 2020, from https://www.china-briefing.com/news/china-environmental-protection-tax/

Cornes, R., and Todd, S. (1986). The Theory of Externalities, Public Goods, and Club Goods. Cambridge, United Kingdom: Cambridge University Press.

Ilanbey, S and Carey, A. (2020). New $60m package unveiled for Victoria’s brightest students. The Age. Retrieved on April 2, 2020, from https://www.theage.com.au/national/victoria/new-60m-package-unveiled-for-victoria-s-brighteststudents-20191024-p533pe.htm

Laffont, J. (2008) “Externalities,” in The New Palgrave Dictionary of Economics, ed. by Steven N. Durlauf and Lawrence E. Blume (London: Palgrave Macmillan).

Mankiw, N. G. (2015). Essentials of economics. Stamford, CT: Cengage Learning. 7th Ed.

Wright, S. (2020). Economic effect of disasters runs deeper than we think. The Age. Retrieved on April 2, 2020, from https://www.theage.com.au/politics/federal/economic-effect-of-disasters-runs-deeper-than-we-think20200120-p53sw9.html