Explain why the emission of pollution by a firm into the atm
The emission of pollution by a firm into the atmosphere or into a river may be economically inefficient because air or water pollution would have very harmfully effects such as cancer, acid rain, global warming etc on society, plants and on animals. Firms that emits pollution into the environment usually don't account for this in their costs of production, whereas society is obligated to the pay the costs of dealing with this pollution problem. Therefore, the pollution emitted by the firm is a negative externality, as negative externality occurs when the social cost is greater than the private cost. How the effects of negative externalities can lead to an economically inefficient allocation of resources is illustrated in figure 1 below. In figure 1, the demand curve DD is for a particular commodity and the supply curve SS reflects only private cost of production. When the cost of externalities is included, the supply curve shifts to left to S1S1 and the equilibrium price is increased to P1. Wh
If this was done, then this would provide low cost firms with an incentive to cut pollution, otherwise they would be compelled to cut their production, which would result in a fall in their profits. The effects of this problem can be seen in the graph below. Consequently if tax is levied on the amount of pollution generated then polluters will be forced to cut down on the amount of pollution they generate. Therefore in a free market there would be an over consumption of this commodity in relation to the optimal level. For example if a factory which emits smoke pollution as a result of producing good sugar, then those living in the area of the factory will experience a negative externality because the air around the factory is polluted. One problem with this is that, the restrictions on pollution would usually have to apply equally to all firms. If DD is the demand for sugar and SS is the supply curve when only private costs are measured, and the market was free of any government interference, the equilibrium price would be P and the equilibrium quantity Q. The effects of the negative externalities would cause the supply curve to shift to the left. Another problem is that it is extremely difficult to know the precise value of the externality imposed on the community and the community demands for the product, as there is no way of knowing what the economically efficient level of production is and what limits should be placed on the quantity of the product produced. Evaluate two ways of reducing any economic inefficient caused by pollution: One of the ways of reducing economic inefficiency caused by pollution is to impose a tax on the polluter in proportion to the amount of pollution generated. Another way of reducing the problem of pollution is to impose a limit on the amount of pollution an industry is allowed to emit. Therefore, if S1S1 is the new supply curve when the effect of pollution is considered then the economically efficient level of production is Q1. If for instance, a tax per unit of AB is placed on the production of sugar, then the economically efficient level of output will fall to Q1. As a result it would be more efficient if those industries which could reduce pollution at a lower cost than other industries were assigned a lower pollution limit.
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