Sunday, August 4, 2013

Nice current event example illustrating a Negative Externality. Water treatment plants in England are polluting the waterways


Outlet Pipe on beach at Bexhill on Sea, East Sussex

Here is a current and relevant example of a market not taking into account "Negative Externalities" in the production of a good.

If the production of a good imposes a cost on others that is not paid for by the producers and/or the consumers of that good, then it is said to have created a negative externality..  To correct for this externality the government can internalize that cost by imposing taxes or penalties on either the producers or consumers of the good.  This will "internalize the external cost" of production and consumption of the good.

In the example below, water treatment plants are pouring refuse into the public waterways for "free" instead of paying for proper clean up of that refuse by installing the equipment necessary to clean it.  The dirty water is polluting areas that others use for recreational or other purposes.

The article suggest the fines are not high enough for the polluters to changer their behavior.  The fines are cheaper to pay than installing the necessary equipment.
""The most persistent and frequent polluters of England's rivers and beaches are the nation's 10 biggest water companies, an Observerinvestigation has revealed. 
The companies, which are responsible for treating waste water and delivering clean supplies, have been punished for more than 1,000 incidents in the past nine years, but fined a total of only £3.5m. 
The revelations have raised concern that the financial penalties are far too low to change the behaviour of an industry that generates billions of pounds in profits and shareholder dividends. The charge is backed by the Sentencing Council for England and Wales, which is proposing major hikes in penalties. 
Pollution incidents, which have included sewage illegally pouring into a harbour for more than a year, and managers destroying records, show no sign of declining, according to data obtained from the Environment Agency (EA) under freedom of information rules. Only a third of the 1,000 incidents led to a fine (of an average of just £10,800); the rest resulted in cautions.
"In law, the 'polluter pays' principle is supposed to deter companies from damaging the environment, but in this case the penalties appear to be so pitiful that water companies seem to be accepting them as the price of doing business," Joan Walley MP, chair of the Environmental Audit Committee (EAC), told the Observer. "The sentencing council must ensure that courts take into account the profits made from environmental crimes, and that fines have a sufficient deterrent effect."""

Here is a PowerPoint I created to show how this plays out in a supply and demand graph.  Key concept in AP Microeconomics!!
View My Stats