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Externalities Cost and Benefits and Proposed Solutions

What is meant by transnational.

a- Externalities.

b- How is the world trying to deal with them?

c- What are the problems in implementing the proposed solution?

Externality is defined as a cost or benefit external to an exchange.1 Thus externalities occurs when there is a disruption between social cost and private costs through indirect effects. Decision makers do not internalize all costs this gives rise to the ‘spill over effect’ for which society pays the full opportunity cost of any activity that uses its scarce resources for which no compensation is paid or received. The individual decision-makers is the firm or the customer and the external costs and benefits will not enter into the individual’s or firm’s decision-making processes. 2

There are two types of externalities. The Positive Externalities like for example education, vaccination innovations in new technologies where the social cost is incurred by the whole society as a result of the production/ consumption of the good. The Negative Externalities occurs when the social cost is bigger than the private cost. Environmental pollution and degradation within a state or region or on a global conveys information about constantly changing market conditions and allows for flexibility in decision-making. Example can be automobile exhaust, cigarette smoking, poisonous discharge of wastes in the rivers/ sea etc., There is distortion whereby there is market failures so that the marginal social cost is not equal to marginal social benefit as opposed to the public good. There is distortion interfering with the working of the ‘invisible hand’.

Transnational Externalities are environmental problems at a global level such as polluting, depletion and degradation of natural resources on a global level arise because of market failures and government failures. Transnational Externalities may for example cause the global warming climate change or greenhouse gas emission and ozone depletion. How and why does this happen?

Gases like carbon dioxide and water vapour which naturally occur in Earth’s atmosphere, trap heat and makes life possible on earth. Humans are greatly adding to the presence of such gases , commonly referred to as green house gases (GCG’s) by burning fossil fuels and through industrial activities as well as various kind of land use like deforestation. These work against us when they trap too much sunlight and block outward radiation, create climatic hazards and disrupt the ecosystems. Though public good can be derived through benefit for agriculture and forestry in various locations by increasing productivity as a result of longer growing seasons and increased fertilization but the public bad are more for there might be less safe water for drinking because of acid rain for example, rising of sea level might cause flooding of coastal areas and wide spread of infectious diseases never heard before.

What can be the solutions to these externalities? There are three main theories about how to combat negative externalities dealt by Pigou, coase and Baumol and Oates. Pigou considers the problems of smoke emission by a factory by imposing a per unit tax on output of the firm generating the negative externality. The per unit tax should be equal to the difference between the social marginal cost and the private marginal cost to the social optimal output. Coase is of opinion that the pollution problem is of reciprocal nature where the government intervention is needed to specify standards or to levying a tax to correct the externalities which is liable to the firm reciprocally. As for Baumol and Oates solution are decide the ambient standards based on available scientific knowledge or social preferences, pursue one of the following two options namely standards and charges approach or standards and permits approach. The United Nation Conference on Environment and Development (UNCED) held at Rio de Janeiro in 1992 specifies to incorporate environmental costs in decisions of producers and consumers in order to reverse the tendency to treat environment as a “free good” and to move more fully towards the integration of social and environmental costs in economic activities so that prices reflect the relative scarcity and total value of resources and contribute towards the prevention of environment degradation , to include whenever appropriate the use of market principles in the framing of economic instruments and policies to pursue sustainable development (UNCED AGENDA21, Chapter 8 pp85)

The solution takes three aspects into consideration namely trade related, pollution and biodiversity in regulating global public bad, hazardous chemicals, trade in hazardous chemicals, trade in endangered species, exports of goods causing environmental problems in importing countries whether processes and production methods requirements are legitimated under GATT rules. The pollution charges are based on the volume of effluents/ emissions and concentrations of pollutants Assignments of tradable pollution permits and creation of markets to determine their prices. Thus the polluter pays principle is to install pollution abatement on equipment or otherwise change production techniques so as to reduce the amount of pollution, to reduce pollution-causing activity or simply pays the price to pollute.

The permit for polluting would be a worldwide allowance that reallocate abatement efforts to those who could do so most effectively. Economic incentives, or market-based instruments covers the idea of creating charges or tax-type systems that encourage producers and consumers to internalize the costs of their economic actions. Polluters have to pay for their implicit claim on the environmental services. 3.. The advantages of pollution trading show cost effectiveness in achieving pollution control in a less costly way because the pollution tax causes the supply curve to rise. As a result the quantity consumed tends to decrease the costs being higher for the purchaser. But the price received by the producer is lower than it was before, as the tax is paid to the government. The environmental cost is then shared between the producer and the consumer of the good. The more competition there is on the market, the less the consumer will pay. 4 Eliminating all pollution is impossible . Economic approach of permits and pigavian taxes reduce the cost of environmental protection and should increase public’s demand for a clean environment.

Collective action is needed at the global level at the citizenship level. Green peace, friends of the earth are non profit organisation funded by donations whose aim is to protect the environment. The Integration different types of businesses which merge and take over and decide jointly on the optimum input to achieve equilibrium or less in social cost and to private cost benefiting society and also the firms. for example the more an orchard owner is encouraged to plant more trees and to increase his output in quality, quantity and variety of fruits the more another neighboring business dealing with bees would progress. Moral codes and sanctions based on values and civic education.

The role of technological improvements can play in reducing carbon emissions and lowering the costs of those reductions. Recent policy proposals have included tax credits for residential and commercial purchasers of new energy-efficient homes and energy-efficient equipment such as electric and natural gas heat pumps, natural gas water heaters, advanced central air conditioners, and fuel cells as well as investment tax credits for fuel-efficient vehicles powered by electricity fuel cells and hybrid power. In addition tax incentives other proposals include direct spending on research, development and deployment of energy-efficient The incentive for pollution reduction works as businesses would make profits on extra permits. Enforce use of green technology for Mauritius example the use of bagasse to produce electricity or of coconut oil to produce fuel as alternative.

However, there are many obstacles in implementing solutions to externalities. Economic cost for the same physical quantity of pollution would be different from different locations. For example India’s pollution control policy is characterized by a command and control regime. Penalties are unrelated to the extent of violations, it is the compliance or non compliance not the extent of compliance which is taken into consideration. . The limitations of anti-pollution legislations for ‘standard setting’ to be effective, need knowledge of costs and benefits curves. Marginal cost of reducing pollution for individual firms. Some may find it costly to reduce pollution for individual firms. How to calculate that? Contingent valuation method relies on survey material in which people are asked, via questionnaire or interview. Travel cost techniques in terms of the money spent getting recreational facilities, wildlife reserve, forest or canal.

Markets can exist and function efficiently only when property rights on goods and service exchanged are well defined and transaction costs of exchange are small. Market-based control regime but allowance trading would benefit poor countries and excluding developing economies would invite leakage and undermine a treaty’s environmental effectiveness. The relative roles of developed countries or developing countries assume significance because they are in different stages of development and their tradeoffs between environment and development differ. It does not take into account the Marginal cost of reducing pollution for individual firms. Standards may not be effective.

The transfer of technology and the provision of financial resources operated in a manner which was far from favourable to the industrialisation of the Third World: industrialization that was indispensable for the changing of this vertical international division of labour.5 The new techno-economic world is very critical in that pressures on techno-economic world order is very decisive and formidable than ever before. 6 The neoliberal regime as it has been sustained by global financial institutions and other donor agencies, is very critical in that pressures on the Third World are more decisive and formidable than ever before. 7 This would lead to ‘carbon colonialism’ if wealthy investors could depress allowance and credit prices leading poorer countries countries to sell out their future at loss. This sincere concern about market power and must be addressed on its merits. These are fundamental human right and we should not be debased by considering them in economic terms..

The seed that allow plants, to grow the water that allows irrigation of fields. Every one of these resources is today being handed over through local agents of globalisation, through functionaries of the World Bank and IMF to a handful of cooperations. 8 It is an economy of disposible people.9 Trade that is based on justice to the earth and is therefore ecological.

In conclusion Pigian policies may apply but to what extent? How far has globalisation affect Externalities? How to achieve cost effectiveness in pollution control in a less costly way because environment is a scarce good? We cannot dissociate ourselves from the fact that the rapport between rich and poor countries is often detrimental to the poor , the rich are always trying to take advantages on the poor countries at any cost. We may consider the recent invasion of Afghanistan where tons of bombs were rained in the search of Ben Laden, a ghost, the same applies to Iraq which has been colonised for its fuel. Who is the greatest polluter of the environment the small farmer who has used centuries old methods of farming or these multi-nationals with their OGM (Genetically Modified Organic) and all sorts of chemicals. The better way is to sensitize and empower the people through cooperative movements to find alternatives the whole world would gain. These should be achieved through community building. Long Run firm which would benefice from taking into consideration implicit cost should be encouraged.

In the event we do not act now, if we leave every thing to the World Trade Organisation and their allies who are more anxious about heir own interest than any other thing, we are bound to food allergies and diseases like Mad Cow and SARS. The icebergs are already melting down, climate and natural hazards are more common. Already many species have disappeared or are on the verge of disappearing. Old and unknown disease have appeared, we should get prepared for the end of life as we know it on our planet may be the end of humankind, itself. Consciousness raising 10 is indispensable.

Notes

1- Peter Maunder, Danny Myers, Nancy Wall, Roger LeRoy Miller, 2000 Haper Collins Publishers Limited, ‘Economics Explained’. pp71

2-Peter Maunder, Danny Myers, Nancy Wall, Roger LeRoy Miller, 2000 Haper Collins Publishers Limited, ‘Economics Explained’ pp183

3- Peter Maunder, Danny Myers, Nancy Wall, Roger LeRoy Miller, 2000 Haper Collins Publishers Limited, ‘Economics Explained’ pp184

4-Ibid

5- Rajen Harshe and K.M Seethi, Orient Long man Private Limited 2005, “ Engaging with the world critcal reflections on India’s Foreign Policy pp5

6- Rajen Harshe and K.M Seethi, Orient Long man Private Limited 2005, “ Engaging with the world critcal reflections on India’s Foreign Policy pp7

7- Rajen Harshe and K.M Seethi, Orient Long man Private Limited 2005, “ Engaging with the world critcal reflections on India’s Foreign Policy pp47

8- . Globalisation is a war against people and against the earth. Vandana Shiva, 2002,l’edikasyon pu travayer, ‘Globalaisation, Food Security and War’ pp7

9. Globalisation is a war against people and against the earth. Vandana Shiva, 2002,l’edikasyon pu travayer, ‘Globalaisation, Food Security and War’ pp5 -

10- Globalisation is a war against people and against the earth. Vandana Shiva, 2002,l’edikasyon pu travayer, ‘Globalaisation, Food Security and War’ pp33

Bibliography

1- Peter Maunder, Danny Myers, Nancy Wall, Roger LeRoy Miller, 2000 Haper Collins Publishers Limited, ‘Economics Explained’.

2-Rajen Harshe and K.M Seethi, Orient Long man Private Limited 2005, ‘Engaging with the world critcal reflections on India’s Foreign Policy’

3-Globalisation is a war against people and against the earth. Vandana Shiva, 2002, l’edikasyon pu travayer, ‘Globalaisation, Food Security and War’

4-U. Sankar (Madras School of Economics).

5-Jonathan Baert Wiener Fall 1997 Ressources, ‘Global Trade in Greenhouse Gas Control, Market Merits and Critics’ Concerns” .

6- Michael A. Toman “Climate Change E€conomics and Policies, an Overview’

7-AdamB.Jaffe, Richard G. Newell and Robert N.Stavins, an RFF Anthology Energy-efficient Technologies and Climate Change Policies, Issues and Evidence.

8-Jonathan Baert Wiener, an RFF Anthology, ‘ policy design for international Greenhouse Gas Control

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