Does Identifying A Negative Externality Justify Government Intervention?

Does identifying a negative externality itself justify government intervention?

Presentation

In this paper we are gonna see whether government intervention is sufficiently justified by the appearance of negative externalities.

To answer the question at issue is necessary to address possible solutions to the negative externalities precisely, stressing that with more importance and influence when determining whether state-intervention is needed or not by the mere fact that a negative externality arise on the horizon.

Introduccion

According to the author Jean Jacques Laffont, gives a definition of common use; Externalities are indirect effects of consumption or production activities, ie, effects on different agents to the originator of such activity that do not work through the system prices.1

In other words, are those externalities "Activities affecting other for better or for worse, but they pay for them or be compensated"2

Beyond the impact on individuals or groups, it is considered from the point of view of the economy, the effect of externalities is distorting the market and, consequently, the efficient allocation of resources in an economic system.

Since externalities represent a "market failure" can be handled in principle to market solutions. "Although externalities tend to do that markets are inefficient, state intervention is not always necessary to solve the problem.3 In some circumstances, individuals may seek private solutions.4

There are two types of negative externalities. Consumption and production. We will focus on the latter.

Negative externalities of production

Negative externalities in production are generated when allocating resources provided by the market system cannot be efficient, determining that excessive production not taken into account the social costs that occur to others.

As a result of the externality, the cost to society of producing a good is greater than the cost of having to producers.

For example, environmental pollution, companies emit too much pollution while the state would prevent them, dissuade or discourage the issuing them. 5

One of the causes of negative externalities is the absence of property rights. If property rights are the cause of the externality facing all costs.

Nevertheless, the State establishes alternatives, intervening to address the inefficiencies and thus seek to maximize the total benefit of society.

The social costs -that means totales- of production are higher than private costs. These indirect costs which do not fall in either the producer or the user-include deterioration in the quality of life.In other words, when externalities are negative, private costs are lower than social costs.

The social costs increase with the level of pollution, which rises as production grows, so there will be an overproduction of goods with negative externalities come into play only when private costs, not the costs borne by third parties. Reduction in social costs to a minimum lead to decreased levels of production.

POSSIBLE SOLUTIONS

Possible solutions to the problem of externalities can be public or private.

Among public solutions have two types: Market-based policies and policies of order and control.

In the first type are those incentives for private decision makers solve the problem themselves, such as attempts to provision and correction by the State.

In the second type solutions that directly regulate behavior are included. These are the control and / or governmental persuasion, civil law and contract and attempted delivery and correction by the state, among others.

Among private solutions there are several examples, such as moral codes and private sanctions, organizations (Greenpeace) and Contracts between market participants and those affected by the externality. However, the most efficient and widely used are the Coase Theorem and Pigouvian taxes, which are discussed later in detail.

Externalities occur frequently in areas related to the environment, in cases where property rights are not well defined activities. A classic example is the contamination of air or water. The solutions are applied in reality usually comprise both taxes and subsidies as regulation. Externalities and the environment are related to negative externalities, the clearest explanation of the negative externalities in organic matter in the construction of infrastructure is indicated in a quote from Barry Commoner 6.

POSSIBLE SOLUTIONS TO THE PROBLEM OF PUBLIC EXTERNALITIES.

Control and / or governmental persuasion

These attempts can be divided into two groups:

A) Attempts to persuasion or direction by the government

B) Attempts to direct legal control, which generally refer to negative or detrimental externalities.

  The government may try more or less indirectly promote or restrict certain activities, for example through taxes (if negative externality) or subsidies (if positive externality), and more generally, advocacy or deterrence that reflect the valuation social external effects and allow internalization or realization of that value by the participants. This approach is directly derived from the proposed Pigou.7.

The government can also act more directly, by setting legal standards, given the presence of externalities, set the optimal level of production or consumption.

  Prohibition and criminalization of certain activities. see, for example: Controlled Substances Act (United States))

  Regulation of certain activities such as the imposition of limits or conditions on the use of certain property of others and / or common, eg safety conditions in the workplace; industrial use, etc.

  Regulation on the production, stockpiling and use of certain hazardous substances, etc.

Civil law and contract

This approach is characterized by the attempt to exact definition of what wrapped in property rights and contracts, but leaving as far as possible to the actors themselves implementation and / or defense of such contracts and rights.

Allocation

...