Negative Externality in Australia (Research Paper Sample)

NEGATIVE EXTERNALITY IN AUSTRALIA
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Introduction
Externalities occur when the decisions arrived at by a party fail to factor the costs and benefits likely to be imposed on other parties and the environment. From a society’s viewpoint, the presence of externalities can make people undertake too much or too little of a given activity. On the basis of recognized policy principles, research indicates that the presence of negative externalities often warrants government intervention in order to safeguard the welfare of the society by creating a succinct alignment of marginal social benefits and costs. This paper analyzes some common negative externalities, as well as possible ways through which government intervention may control and regulate these externalities. The study conducted in this paper is based upon a case study of the wastewater management system in Australia. The analysis of negative externalities in this case study is better approached by tackling the following three questions:
Explain what negative externalities are, and why there may be a case for government intervention to address them. Describe some of the ways to correct the negative externalities and the pros and cons of each method. Provide real life examples.
An externality arises when some activities by consumers or producers result in unintended indirect effects over other consumers or producers. Externalities may be negative or positive (Laffont 2008). In this case, negative externalities arise when the action of a party results in damage to other people without any form of compensation being awarded for that damage. Within the context of a business environment, a negative externality refers to a spill-over of an economic transaction that result in negative effects on a party that has no any direct involvement in the activity that causes the externality. Thus, the first party does not incur any costs for the repercussions on society while the second party gets no benefits from the effects inflicted upon them. Externalities constitute one of the many reasons that lead to government intervention within the economic sphere. This is because the production, consumption, as well as investment decisions made by households, individuals, and organizations or firms usually affect people who are not directly involved in the transactionsMost externalities fall into the technical externalities category. In this context, the indirect effects impact on the production and consumption opportunities of other people, though the cost of the product or service does not consider those externalities. Consequently, there exist some differences between the returns or costs to the society and the private returns. Regarding the assertion that technical externalities require government intervention and taxation with an aim of preventing less-than-optimal results has led to an argument by economists that market mechanisms should be allowed to correct for any externalities and offer efficient outcomes. Against this proposition, optimal government regulation might be the implementation of institutional mechanisms that enable proper bargaining between the parties involved in the externalities.
Types of Negative Externalities
There are two types of negative externalities:
Negative Production Externality
These occur when a company’s production degrades the well-being of people who are not entitled to any form of compensation from the polluting firm. Examples of this type of externality include the emission of smoke from factories leading to clean-up expenses in efforts to reduce air pollution by the surrounding communities. Another example is the construction of a water reservoir such as a dam. The result is the destruction of the fishing industry in the river’s upstream. The externality here arises due to the fact that the fishermen who relied on fishing are not compensated by the company that is now bound to benefit from the activities that it carries out on the dam.
Negative Consumption Externality
These arise when the consumption by one individual lowers the well-being of other people who do not receive any compensation from the individual. Examples of these kinds of externalities include an individual smoking a cigarette in a public place thus affecting the well-being of other people within that public place, and who happen to be non-smokers (Holcombe & Sobel 2007).
Ways of Correcting Negative Externalities
Taxation
The government can make use of the pigouvian tax in order to lower the consumption of a particular good or service. For example in the case of cigarette smoking, such a tax can be implemented by the government with an aim of discouraging smokers from acquiring more of this product. One of the demerits of such a government measure is that even with the additional costs; some people may still prefer to consume the product by adjusting their spending. In such a situation, the tax measure becomes more of additional revenue to the government rather than a negative consumption externality that it was supposed to be. Furthermore, companies still retain the option to comply with the new tax or allocate more resources to curb the pollution. In this case, companies might decide to continue causing the externality if the expenses are less than the cost of abating pollution. Companies might also decide to lay-off their workers in order to recover the new taxation costs (Ben-David 2010).Pigouvian tax is often applied as a flat sales tax and not a progressive tax. Thus, the taxation measure does not take into consideration the producers’ or consumers’ willingness and ability to pay. Therefore, the tax could be applied in a manner that makes even the least well-off individuals to pay most of the cost. For instance, the carbon taxes aimed at raising the cost of gasoline and other fossil fuels have become very controversial. The critics of these taxes argue that the least well-off people may not have any choice in their habits of consumption. Thus, they still have to pay for the gasoline for their daily activities. On the other hand, the financially well-off people can cut back rather easily.
Environmental Protection Regulations
A tax can make firms fault to pay up; however, when the tax is made cheaper than another alternative method of production, the problem of pollution cannot be solved. In such a case, the government can give emission permits that regulate the amount of pollution that a company can produce within legal standards.
Tort Law (Tort System)
The system involves a clear definition by the government on the rights of every individual. For example, one has the right to own a property without anybody pouring any form of toxic wastes near the premises. In the war between environmental and commercial interests, it is often easier to support the seemingly defenseless party. This perception fuels the notion that most legislation passed against negative externalities, usually is exaggerated to play within the emotions of the audience observing images of pollution on the media domains. In most of the times, people harbor the notion that large companies are closely connected to pollution (dumping, smog and oil spills) due to incidences resulting from incompetence and gross negligence, but fail to take into account simple human error.
Internalizing Costs
The method of internalizing the costs of particular products is an effective and attractive way of addressing the issue of externalities. Through internalization, the higher social price and cost is achieved, consequently leading to an effective method of allocating resources. The fundamental assumption in this context is that the internalization of costs can quantify external costs.
Choose a case study from your home country (Australia) where an externality exists in a current market. Using the key characteristic of four market structures identify the type of market structure in your case study (ie. monopoly, oligopoly, perfect competition or monopolistic competition). Illustrate the situation with externalities in your case study and the resulting deadweight loss in a diagram and discuss ways that your government has addressed the presence of negative externalities in the market. 
This discussion examines the negative externalities caused by the discharge of effluents into sewerage systems by water users in Australia. There are numerous externalities that relate to the harmful external effects of commercial and residential clients disposing wastewater into the sewerage line before subsequent treatment and disposal. Some particular pollutants are extremely corrosive and cause extensive damage to sewerage and treatment facilities. Additionally, the discharge of non-hazardous substances into sewers (such as nitrogen, salts, and phosphorus) raises the cost of water treatment before its discharge into the environment. Hazardous substances such as corrosive materials and metals often pose substantial health risks to water businesses’ workers and exacerbate the costs of infrastructure maintenance. It is important to note that some pollutants only become hazardous to human beings a t a certain level. Whereas end-of-system treatment to a certain level happens before discharge to the environment, environmental impacts, public health, and amenity could still occur before this happens (Institute of Sustainable Futures 2007). For instance, after a heavy downpour, sewerage systems often overflow and pipes crack, resulting in the pollutant substances getting into the environment, such as urban waterways. This result in external costs similar to those encountered during storm water and wastewater disposal. It is plausible that the issue of wastewater management in Australia presents a wide range of negative externalities that have justified government intervention. Wastewater...