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Three Solutions to Problem of Pollution Externalities


In economics terms an externality or a spill-over can be defined as an effect caused by a party that is not directly concerned with making the economic decision. There can be both negative externalities as well as positive externalities. The externalities can also be called spill over effect.This happens when an economic activity makes a third party to incur external costs (or gains) while not directly taking part in the economic transaction. This means that in a given market, the sellers and buyers do not get the all the benefits and incur all the costs of whichever economic activity they engage in. The main aim is to try and internalize this eternality. In this we mean that the decision maker takes into consideration the effect of his or her decision on the third party. Pollution, which is a negative externality are caused by production or consumption processes. Pollution is divided in several types which include water, air, land, radioactive, noise, and thermal pollution.

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Air pollution is the sign of disturbances to the normal composition of the components which make up the atmosphere. It can also be said to be the changes to the normal atmospheric composition caused by the introduction of foreign substances both knowingly and unknowingly. Air pollution is mostly caused by the reaction of compounds that are reactive and not biodegradable. It can also occur when the natural gaseous exchange cycles such as nitrogen and carbon cycles are interfered with to an extent that excess gas in removed from or added to the atmosphere. These cycles can be tampered with through human actions such as deforestation and release of gaseous emissions. Source of air pollution include: components of electrical manufacturing, roadway construction, fuel production, volcanic eruption, solvent evaporation, solid waste, building demolition, fertilizers plants, auto manufacturing, industrial processes, heat and power generation facilities, motor vehicle exhaust (Blanchard & Fischer 1990).

Water pollution happens when additional impure materials to the water in high quantities. When this continues to the extent that the water declared unfit for its intended use, it is hence said that the water is polluted. Water pollution is mostly caused by infiltration of water bodies by fertilizers and sewages that have compounds such as phosphates and nitrate. An excess of these compounds can lead to the overgrowth of aquatic plants and algae which act as a barrier blocking sun light from reaching other marine life while blocking waterways. This affects marine economic activities such as tourism and fishing (Elson & Cagatay 2000).

The presence of externalities such as pollution in a market based economy would normally be assumed that its rules will direct us to locative efficiency and probably not being socially efficient. The fact that the externality is there hence give an example of a market which has failed to accomplish market efficiency. Thus real locative efficiency may not be achieved until the externality for instance pollution are addressed and put into account for correct economic analysis. Though externalities are not the only sources of market failure they contribute a large percentage to it.

Noise pollution also results from production and consumption processes too. This can be reflected from noise from a factory that is located near civilian settlement, and loud music being played a neighbour next door. Soil pollution is as a result of deposition and accumulation of solid, non-biodegradable wastes and toxic substances which eventually change the soil structure and the normal soil pH of a given sample of soil. Soil pollution may lead to devastating effects such as desertification, clogging and swamping, and if not checked the soil structure will be permanently destroyed. Other types of pollution with bad effects include thermal pollution which leads to the overheating in the atmosphere and radioactive or nuclear pollution which involves the release of radioactive substances such as uranium to the environment (Devra 2004).

Possible Solutions to Pollution Externalities

This externality can be resolved or checked with government intervention and to some extent without government intervention. In one way government can control pollution through prohibition of the activities that lead to pollution, and regulation of the quantity of pollution that is allowed. While civilians can counter pollution through putting in place moral codes of conduct, and supporting companies that are anti-pollution by buying more of their products, advertising them through word of mouth.

These approaches can be executed as explained below;

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Government Intervention Through Prohibition

The government can pass legislations which make most or all pollution activities illegal with heavy penalties for offenders. This is a highly risky plan and should be implemented mostly as a last resort in order to reduce pollution which maybe life threatening to the population in the area. For example the government can prohibited the cutting of trees in the forest by considering it illegal this can reduce the number of trees cut in this forest. The risky aspect about it is that most production activities (such as manufacturing) lead to pollution hence this type of law could lead to a large number of people loosing the source of their livelihoods.

For example, a paint manufacturing factory that is located up-stream on a river which supports a large number of fishermen who live in the area can be dumping its wastes and sludge into the river. With time this will lead to a reduction and eventually death of all the fish which is the fishermen’s source of livelihood. The fishermen will then be rendered jobless. In this situation the government can come in and ban dumping into the river in order to protect the fishermen’s source of livelihood (Hoffman & Turley 2002).Though it should be noted that it not easy for the government to prohibit all the activities that causes pollution.

The government need to get the information regarding the industry and the externalities that result.To accrue this information may require a lot therefore it may prove difficult. It can also be proved impossible for the government to actually prohibit all the activities that causes pollution. A good example is in transport sector where by all the means of transport actually causes a certain form of pollution. This includes horses because they produce some noise that is referred to as pollution. Sometimes it has been noted that it is very hard to identify the particular source of the pollution. There for the government may not be able to identify the area they want to put restriction on and cannot put full restriction on some sectors.

(Heijman 2007) indicated that is also very difficult to get the monetary value of externality as they are generally very difficult to quantify. This is due to the fact that they may reflect ethical views as preferences of the entire population. another difficulty is that the party involved may try to defend his own interest for his own benefit.In such cases other methods of regulating this can be used.

Government Intervention Through Regulation Of Pollution

From a different perspective, instead of prohibiting pollution the government can regulate the levels of pollution through regulation of the amount of pollutants that can be released into a given environment. Regulation can be by use of pigovian taxes. Pigovian tax is tax that is levied to check the negative impact of the externalities. For example in the case of pollution, this tax can be imposed to the firms that cannot regulate the amount of pollution. At the same time they can fail to tax those firms that find it easy to reduce pollution. Unlike other taxes, pigovian taxdoes not reduce the total surplus of the firms unlike other taxes which do reduce the total turnover of the firms.

Another regulation that the government can have is the issuing of tradable pollution permits. (Roy 1992) indicates that the government can decide to issue this permit to regulate the level of pollution by selling these permits to firms involved in the pollution the environmental protection agency known as E.P.A can limit the amount of pollutant or change for the right to pollute for example emission changes and emission standards. They can also restrict the firm to emit a specific amount of polluting waste. These permits are tradable in the market. In addition the government can use control and command regulation where by they where they issue rules which require use of specific pollution control devices on a particular source of pollution or applying strict emission standards to those who emits particular gases that are harmful to the environment.

The government can offer subsides to pollution reduction technologies by so doing they will be encouraging individuals and firms to reduce the rate of pollution. If possible they should be provided for free. For example the use of polythene paper which has been polluting soil. To curb this, governments can subsidize the other type of papers that easily decays; this will encourage people to use the papers that can easily decay.

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Setting up production standards such as quality of equipment to be used, and recruiting experts to help in the regulation of pollution, with reference to the example on the fishermen and the paint manufacturing factory, the government would introduce some sort of payment for the factory on a given amount of waste released into the river. This is because more practical than prohibiting dumping because; prohibition might on the other hand lead to closure of the paint factory hence loss of jobs. Therefore this would be a compromise but the factory will have to pay for it to continue its operation. The government can compensate the fishermen by paying them a percentage of the amount paid by the factory for the damage done to the river (Landsgurg & Feintone, 1997).

There are disadvantages that are associated with this option of regulation to both government and the population. One being that the government will have to employ extra help from experts to help in checking the levels of pollution and how much is paid. Secondly, there is basically no reason for the firms to reduce pollution apart from the penalty of paying for the extra costs, and the finally, firms that make a lot of money would continue dumping because they have can pay for it. Nevertheless, this seems to be the more practicable approach the government could take.

Solution Without Government Intervention

Pollution can also be countered without government intervention as sometimes government is slow to respond to some urgent issues. One way of doing this is through the adoption of some moral codes of conduct, and supporting companies that are anti-pollution by buying more of their products, advertising them through word of mouth (Brugan 2003).

Moral codes which have root in people’s way of life do not need to be written nor have police in place to look out for offenders. Anti-pollution codes such as littering, smoking in public areas, the use of road-unworthy vehicles among other are just but a few examples that can be used to counter pollution. Bring out citizens who have respect for their environment and have the general goodwill of their environment at heart can go a long way into reducing the levels of pollution. A manufacturing company that has workers who are environmentally conscious may make the company to reconsider its pollution due to being enlightened (Romer 2005).

In addition, social conventions can be used to cope with the negative effects of pollution. They can be used as a tool to make people be accountable and aware of the pollution they cause. This can make them change their behaviour and instil in them the responsibility they have towards the environment, this can be done especially to young children so that they grow with these values in them. These conventions can also be used to teach people on how to respond to pollution problems at their level.

On the other had it is difficult to hold individuals accountable to the pollution they have caused. Taking individuals to account involves time and costs; time in the sense that while you are trying to make them answerable, they may be doing it somewhere else or someone else can also be doing it. Costs in the sense that these processes involve lawsuits which are expensive in terms of paying lawyers and the period in may take to for the suit to materialise. The time and money spent will end up being more than the damage that has been caused to the environment.

Due to the above difficulties some non governmental organisations have also come up with various strategies to ensure reduction in the rate of pollution. One of these strategies includes sensitizing people on the dangers of polluting the environment. The carry out campaign that educates then people on these dangers and what should be done to ensure less example of this is the global concern about the depreciating ozone layer. They have also participated by contributing to the projects that are wholly meant for the reduction of the pollution.


In a market that is purely private a good or service is usually produced too much or too little. Market failures are caused by externalities; this is because the market players tend to tend to prioritise their personal costs in front of those costs of outsiders. It should be noted that the market failure usually occurs on public goods. Pollution is also common to public goods. They tend to keep their personal welfare maximum through equating the marginal personal advantage from an action with the marginal private costs. The rational of this is to categorise and negotiate with any would be 3rd parties in order to make it difficult for them to have a reasonable effect in the market (Mankiw 1998).

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The problems associated with pollution have a capability to cripple a country’s economy if it spins out of control. The fact that countries such as the U.K., U.S. and majority of the European Union are passing laws to combat pollution send a message that it effects are not good. Therefore it is important for any economy to be educated to increase awareness of these sensitive issues. The environment qualities now and in future are an important aspect globally. Hence, externalities are being considered in major decision making processes. In most cases the “social cost” of fuel and electricity can basically be related to impacts to the environment and production, the balance of trade, the exhaustion of nonrenewable resources together with many more impacts.

If not checked pollution may lead to an environmental collapse globally. If possible it must be ensured that the 1st world counties must work together with the 3rd world countries to ensure that the 1st worlds do not add to these environmental problems; this can be done while at the same time coming up with ways of providing cheap technologies that are both efficient and effective to the 3rd world countries. On the other hand conservation strategies should be brought into play, to protect the little that is remaining in its pure form.

It can also be seen that the government has a major law to play in reduction of this externalities caused by pollution. They have the mandate to prohibit pollution as well as set a few regulations that are involved in pollution reduction. Pollution being a spillover effect can be reduced to a considerable amount if the third party takes into account the welfare of the third party. It is usually hard for all the measures to be implemented.The welfare of the third party can be taken into account and also the economic value of the firm.


Brugan, BR 2003, Pollution of Lakes and Rivers: A Paleo-environmental Perspective, Journal of Paleolimnology, vol. 30, no. 2, pp. 249-250.

Devra, LD 2004, When Smoke Ran Like Water: Tales of Environmental Deception and the Battle against Pollution, Basic Books, New York.

Heijman, W 2007, Regional Externalities , Springer publishers, London.

Roy, E 1992, Welfare Economics and Externalities in an Open Ended Universe: A Modern Austrian Perspective. Kluwer Academic Press :Boston

Landsgurg, SE & Feintone, LJ 1997, Macroeconomics, McGraw-Hill, USA.

Mankiw, G 1998, Principles of macroeconomics, Dryden publishers, New York.

Olivier Jean Blanchard and Stanley, 1990, Fischer National bureau of economic research: Macroeconomics annual, MIT Press.

Elson, D & Cagatay, Nilufer 2000, The Social Content of Macroeconomic Policies, World Development 28(7): 1347–64.

Hoffman, K.D., Turley, L.W. (2002), “Atmospherics, service encounters and consumer decision making: an integrative perspective”, Journal of Marketing Theory and Practice, 10(2), 33-47.

Paul Romer et al, 2005, Macroeconomics, Worth Publication.

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