Question

why do limits on pollution emissions fail to internalize the externality that generates the pollution?

Answer 1

Air pollution is basically a negative externality: it imposes external costs on people outside a polluting consumer transaction. In addition, economists generally describe air pollution in development as a negative externality. From an economic point of view, demand law implies an inverse relationship between cost and consumed quantity of a marketable product. If a product does not have a well-established market, however, this product is most likely to be undervalued. This is the case for natural systems like air or water. The lack of property rights for these natural resources and the lack of environmental control and legal protection for pollution receptors make it possible for a corporation to view water as a commodity that can be freely used as a common resource, thereby neglecting all the external costs levied on other economic agents. In other words, if property rights to pollution were well-defined, companies would have to buy the right to pollute it and emissions could be internalized through a system for the market.

A type of public services provides benefits at zero marginal cost for individuals or businesses and does not exclude anyone from accessing them. The emergence of such pure public goods prompted the adoption of environmental policies by governments. Some of these policies follow an approach of command and control that does not take economic responses into account. Economists also argue that these policies are not cost-effective, sometimes have unintended environmental consequences, and sometimes they are unsuccessful. In turn, this approach used regulation to address externalities of emissions by means of uniform standards.

The government can use regulations and laws to interfere in a market. The Health and Safety at Work Act, for example, covers all businesses in the public and private sectors. Local councils may take action against loud, unruly residents or enact by-laws that prevent liquor use by the public. A prohibition on smoking in public places was enforced by the British government in July 2007. Directives have been implemented by the European Union on how to dispose of consumer durables such as vehicles, batteries, freezers and other items. It is now the duty of manufacturers to provide customers with facilities to return their discarded goods.