Answer to Question #251276 in Economics for Marsha

Question

You are a resident, your house is on the border of an industrial area. There is a large factory near your house that manufactures products that are transported to another province. Large trucks call at the factory day & night & causes air pollution & a deafening noise. “If the transport enterprise would pay me some compensation for the noise & pollution I would be able to sell my house or possibly put up with the situation. But things can’t go on like this” complained Mr. A to a member of the town council. “Never mind” he said “I’ll think of a way of getting them to pay for the external costs.”

 1. What do you consider the external costs is?

2. How could the town council compel the transport enterprise to pay for these costs?

3.What is the most important limitation regarding the introduction of pollution charges? 

Answer 1

1. An external cost is the cost incurred by an individual, firm or community as a result of an economic transaction which they are not directly involved in. External costs, also called 'spillovers' and 'third party costs' can arise from both production and consumption.

2. The town council may compel the transport enterprise to pay for these costs throughout the imposing tax for pollution or setting some limits of pollution.

3. In practice, governments do not know what the abatement cost for particular pollution is. Thus, pollution charges tend to be below this economic level, which is difficult to estimate. It should be noted that if pollution taxes are too high, polluters are being excessively penalised. The aim of zero pollution is likely to be uneconomic and unaffordable, if the cost of pollution abatement exceeds the cost of the pollution itself. However, even sub-optimal charges will have some impact on the behaviour of polluters.