Aiu Econ Unit 4

Topics: Externality, Pigovian tax, Pollution Pages: 2 (570 words) Published: February 6, 2013
ECON220-1205B-05 : Microeconomics


Kendra M Hutchins
AIU Online

This paper will discuss the concerns of correcting the effects of gases and particulates emitted by a local power plant and how the market activities have unintended positive or negative effects outside the market’s scope. These effects are referred to as externalities and therefore, will examine the cost and benefits of each action.

In the business world, things will come up that will either benefit both sides or vice versa. Because these type of things come up, your company has to be ready for these things. Usually externalities are set about as a benefit for business deal to go through. Externalities are generated when individuals impose costs on or provide benefits for others. They usually do not have an economic incentive to take those cost or benefits into account. This results in either a negative or a positive externality. “A negative externality is generated when a particular side effect imposes a cost on others. A positive externality is a side effect that generates benefits for others.” (Krugman, 2011). I feel the government should step in when this things affect the US in a negative way. They control so many other aspects of business so why not the bad externalities. There are many ways in which the government controls the amount of emissions and pollutants that are released, but the most two common ways they use is to tax the companies that are producing the pollutants. This is called the Pigouvian Tax. A Pigouvian Tax is a tax on external activities. These externalities are actions not taken into account by the acting party. For example, “pollution is considered an external activity to many industrial processes; therefore, the government might impose a tax on polluters”. (WordIQ, 2012). Another way the government can control the amount of emissions is to directly tax the pollution. This would put more of a...
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