Exploring The Relationship Between Negative Externalities And Global Warming

Introduction

An externality is the cost or benefit that affects an unrelated third party who did not choose to incur that cost or benefit. Externalities can be negative or positive, and externalities can result from either the production or the consumption of a good or both. An externality occurs when an economic activity has either a spillover cost or spillover benefit on a bystander.

A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it. Typical negative externalities are environmental pollution and environmental damage. Environmental pollution means that firms or factory might pump pollutants into the air while producing some goods; environmental damage means that excessive or improper use of natural resources, leading to changes in natural environment. Negative externalities can divided to negative externality in production and consumption.

a) Negative Externality in Production: Making furniture by cutting down trees leads to negative externalities to other people. It leads to higher global warming as there are less trees to absorb carbon dioxide.

b)

However, the marginal costs of controlling harm be equalized across sources. If the relationship between the activity and the marginal harm varies across sources, a uniform charge cannot achieve the optimal result level. This assumption works for some pollution taxes. In the case of a carbon tax, assume that a unit of carbon production causes a unit of carbon emission, and causes a unit of external harm in global warming. Under these conditions, a properly calibrated uniform tax on carbon production increases the marginal cost of carbon production to the optimal level while minimizing other distortions of economic