Economics: Negative Production and Consumption Externalities

Describe and evaluate economic policy measures that can be used to reduce negative consumption and negative production externalities.

Economic policy making is often a field of government decision-making or academia that is regularly filled with confusing terminology and definitions to the average person and thus somewhat confusing, this article looks at two of these such terms; �negative production externalities and negative consumption externalities’ and attempts to dissect their nature and makeup to some degree. However, before one can start down this pathway and examine, expand and evaluate two of the important economic policy options available in regards to understanding and influencing �negative production and consumption externalities’ one must first make an effort to explain what these two economic and trade terms actually mean in both policy language and real world terminology.

According to one leading academic source, the University of Berkley department of Environmental Economics and Policy ; �Negative Production Externalities’ can be defined as: the production activities of one individual or organization that causes the imposition of cost/benefits on other individuals that are not transmitted accurately through the market at large. While the term �Negative Consumption Externalities’ is defined as being; the consumption activities of one individual or entity that causes the imposing of cost/benefits onto other individuals that are not correctly shown within the market, both these definitions are also settled upon within text books such as �Economics 4th Edition ’.

Now that a clear concise economic definition has been given for both of these important terms, it obviously worthwhile to expand upon these definitions and provide examples in a real-world sense, which will enable a more competent level of understanding, for those reading this paper. �Production and Consumption Externalities’ often include events and situations, arising from �market failure’ due to price mechanism problems, such as the following; air pollution from coal power, ground water pollution from fertilizer use, food contamination and toxic exposure to food workers from pesticides, soil erosion from seaside construction.

With an obvious amount of groundwork having been laid towards explaining these terms, it is critical that we explain and examine why �Externalities’, as they are often referred to when written within economic texts and papers and will be referred to throughout this paper, are of such importance to economic policy making and what actual policy measures are available for use in diluting their economic effects and impact and how influential these particular policies may or may not be. The study of �Externality’ effects is exceedingly important to typical economics strategy for it deals specifically with the associated problems generated by negative production and negative consumption inside the market. But regardless of the overall importance to basic economics, this study is an obvious cornerstone to simple understanding of global markets and cost/benefit decisions made by various groups and, more so now however than at any time in the past, in the shaping of new economic debates, in the advent of �Climate Change’, such as �Economic Environmental Policy’ decision-making and is often associated with discussion surrounding �property rights’ . Although if one were to examine local government policy and zoning then �negative externality’ decisions would be quite evident. This sudden shift and policy inclusion has been quite evident in the current global warming debate, and highlighted by the associated costs to the community created by these global changes and the benefits that can be produced through subsidies and investment opportunities as a way of reducing the implications.

�Externalities’ are measured in terms of �Social Marginal Cost’ (SMC) and Private �Marginal Benefit’ (PMB), which measures the costs and benefits associated with these events and helps economists formulate policy tools designed to influence them. Such policy measures that may reduce the negative aspects of these �externalities’ include; Social Conventions, Mergers, Regulatory Limits, Property Rights, Pigouvian Taxes (corrective taxes), Coase Theorem and Bargaining, Tradeable Pollution Rights and Subsidies to encourage opposing positive externalities (as in the case of solar power). All of these policies are important tools to aiming to combat negative fluctuations within the economy, whether used separately at times or in tandem (situation dependent), however, due to the length of this paper, only a select few of these policies will be expanded upon and examined in length based on their perceived importance and widespread use.

The first policy tool examines will be that of �property rights’ at times referred to as �private property rights’, the establishment of property rights over various area’s of the environment provides an alternate framework to work within, when looking for ways to solve the problem of negative externalities. Property rights are defined as; the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals and/or enterprise. All economic goods have a property rights attribute to their makeup. The use of private property rights offers a number of solutions to the predicaments posed by �negative externalities’. The primary benefit of private property rights is firstly seen in its legal attributes; the establishment and enforcement of superior private property rights by the legal system would allow, and has allowed (such as Hinkley vs. Pacific Gas and Electric Company, as portrayed in the screenplay Erin Brockovich ) sufferers of negative externalities to bring to court actions against the offending party for compensation for the damage caused thus reducing the willingness of an entity to create problems within the region it operates within.

The prime example often cited for property rights is that of waste pollution in a dual use river system (a system that has two or more entities making use of this resource), if property rights to a section of river are assigned to a particular fishing association, then that association will be able to take legal action against the chemical or manufacturing plant that resides upstream and during the course of production pollutes the river