Understanding the Economics of Pollution

Pollution are negative externalities which involved cost to the third party as a result of economic activity. In any economic activity, the producer and consumer are the first and second parties, and individuals or organizations are the third parties which are indirectly affected. Spillover effects, external costs are also referred to as externalities.

The by-product of waste, such as carbon emission, wastewater and solid wastes from manufacturers, are also externalities. Externalities arise from misallocation or uncertain allocation of resources. For instance, no one owns the oceans or the seas. Ship passing may emit pollution without fear of being sued. Thus, it is essential to establish property rights that are inherent to successful market economies. An extensive allocation of property rights allows market economies to develop fully and easily identify polluters.

Any pollution, which is called external cost, creates the marginal social cost (MSC) curve higher than the marginal private cost (MPC).

It is where MSC is equal with MSB at Q1, where the socially efficient allocation is located. It is a lower output compared to market equilibrium output at Q2

The firm emitting pollution decides based on the direct cost and profit and does not deliberate on the indirect cost to the individuals or communities affected by the pollution. These indirect costs reduce the quality of life, increase health costs, and reduce production opportunities. For instance, when the water pollution in Boracay harms tourism in Western Visayas, the hotel or restaurants responsible for dumping untreated wastewater do not shoulder the indirect cost. Thus, they will not pass the cost to their guest. Instead, the social cost or the costs of production are greater than the private cost.

The social cost due to pollution increase with the production level. Hence firms overproduced goods that reflect only the private cost without considering the external cost. If firms started to minimize the social cost, it would likely result in a lower production level. Similarly, if the society tried to maximize social returns instead of private returns result in underproduction level.

It is where MSC is equal with MSB at Q1, the socially efficient allocation, a lower output compared to market equilibrium output at Q2

The firm emitting pollution decides based on the direct cost and profit and does not deliberate on the indirect cost to the individuals or communities affected by the pollution. These indirect costs reduce the quality of life, increase health costs, and reduce production opportunities. For instance, when the water pollution in Boracay harms tourism in Western Visayas, the hotel or restaurants responsible for dumping untreated wastewater do not shoulder the indirect cost. Thus, they will not pass the cost to their guest. Instead, the social cost or the costs of production are greater than the private cost.

The social cost due to pollution increase with the production level. Hence firms overproduced goods that reflect only the private cost without considering the external cost. If firms started to minimize the social cost, it would likely result in a lower production level. Similarly, if the society tried to maximize social returns instead of private returns result in underproduction level.