Journey in Learning Economics:Part 7

The externality.

Conceptually, for economist pollution is nothing but a negative externality. An externality is a cost or benefit of a transaction upon a third party, who does not wish to receive the same. For example, if your neighbour hires a band and celebrates a really raucous party in your home then he is a client or a supplier of a service. However, you who has been made to listen to this noise or wonderful music, depending upon your prediction, has suffered an externality. Pollution is the most well known of the negative externality. An externality is basically a cost or benefit that is hidden or not obvious. In case of pollution the producer is aware of different costs of his production, however he is not aware of the implementation costs. The correct economic perspective in this scenario is to make the polluter pay the costs of the production upon the environment.

                       Many people think the free market to be an enemy of the environment. But is it so. Were the pollution less severe in socialist countries. Were the countries who didnt enjoy democratic structure more pollution free. Was environment sensitivity more in license regime? The answer is an emphatic no. With the progress of capitalism pollution is lot less severe in developed countries than it used to be in early 20th century. And the countries we still see a complete lack of conservation and cleanliness ethics are the countries least developed ones. Indira Gandhi virtually summed it up when she stated that poverty is the greatest pollutant.

                  Free market and economy is neither a cause of pollution. Nor can we accuse production. It is the mode and manner of production which has effects upon the quality of air water and land. A subtle distinction but nevertheless important. Mass production through division of labour will remain even when there is little or no pollution. The progress the society has made, the cumulative effect of our joint and shared knowledge can not be undone. The journey of economy can be to an extent compared with journey of child through mother’s womb. There will be blood. There will be pain. But eventually the society will recover from the loss. The only way in which pollution can be decreased is to enable the economy to progress so that it will undo its own doing.

                 Countries use  various methods and means to control pollution. Command and control is the most popular paradigm in this respect. Basically command and control structure prescribes certain sets of dos and donts in order to contain pollution. For e.g. annualcertain pollutant from a factory can not exceed a certain amount. The companies shall maintain this and this safeguard and shall use this and this technology. For e.g. engines of cars should comply with euro 3 norms, should use carbon filters and so on. This structure has helped somewhat in reducing emission of pollution in western countries. Not in india though. These laws were not applied strictly in india. Nevertheless, even after giving due regards to the role played by the command and control structure, it will have to be admitted that this structure has certain limitations. The foremost is lack of incentive. This structure is based upon fear of sanction. The risk of punishment is the only incentive. If a company violates the command, it will have to face sanction. Where is the incentive? If the pollution level are already below the prescribed limit then there is no incentive to reduce it further. This arrangement thus requires that the pollution limits should be regulated and revised periodically. For that we need regulator and eventually we face the problem of regulatory capture. Second limitation is the difficulty to enforce these regulations. A complete administrative and bureaucratic setup becomes necessary to implement these rules and regulations. All the while the polluter is simply reducing his emission. He is not paying for removal of the pollution already done.

            Another alternative which is simple, provides the government with opportunity to earn some extra revenue, provides incentive to the producer to consistently lower the pollution is a pollution tax or surcharge proportional to the pollution being caused. This tax is market friendly and in accordance with the rules of economics. the only disadvantage is that this tax is politically difficult to implement. Second is that in a globalised world this tax can be imposed only simultaneously by all the nations concerned. As soon as one of the nations imposes the tax, the cost of doing business in such nation increases and the demand of the nation as a place to do business decreases. Thus the investment coming to a country decrease. Globalisation has, in a way started the global fight against environmental degradation and has simultaneously made an individual solution to this global problem impossible.

            One more method is the marketable permits. They are akin to carbon credits, supposing that one knows what is a carbon credit. In this system companies are given permit to emit certain amount of pollutant annually. If they succeed in reducing their pollution lower than what permitted, they can carry on these saved units to next year and can even sell them to those who did not limit their emission beyond the limit. Gradually the permissible limits of the emission are reduced until they limits of pollution come at permitted level. These permits have the advantage of giving incentive to reduce the pollution beyond prescribed limits.

              The issue between the developing and developed nations over the environment issue is basically over economics of the issue. The stand of the developing countries is that historically these are the developed nations who have contributed to the major share and chunk of green house emission. These nations have been and still are committing greatest emission. More over these nations have developed superior technologies by which these emissions can be controlled and minimised. They can higher GDP and thus these nations can obviously manage to afford these technologies. They further argue that poverty is the greatest polluter. Thus though they share the environmental concerns they can not be bogged down by the environment concerns in their tasks and duty to progress and develop. The only way to impose environmental responsibility upon these nations is that the developed nations should commit to the legally binding commitments and transfer technology to the developing nations so that developing nations can commit to environmental emission reducing goals without compromising with their development goals. Thus the concept of common but differentiated responsibility. Those who have polluted more should pay more. Developed nations especially USA argues that any unilateral emission goals self imposed by one country would immediately lead to the movement of capital to the developing nations. These are the developing nations who are polluting more, take china for e.g. and it shall be unjust to allow their already developed economies to become more developed. What matters is the present emission goals. The legally binding emission targets upon these nations can not be made conditional upon transfer of technology. In a globalised economy, in developed nations the cost of conducting business is already higher than developing economy and the same can not be made still higher which will eventually lead to loss of capital and GDP in such economies. They argue that even if their have to be some restrictions they should be market friendly and universal. So the debate goes and environment suffers.

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