abatement: Abatement of pollution is a reduction in the rates at which gaseous, liquid, or solid wastes are emitted into the environment.

negative externalities: Negative externalities (or “spillovers”) such as pollution are market failures caused when the costs of an activity are incurred by third parties who do not have input into the decision process that yields the activity. External costs are largely ignored by individual private decision-makers. internalization: Internalization is the process of adjusting prices and output to reflect all external costs or benefits.

Pollution (a negative externality or external cost) can arise from either consumption or production. Water pollution flows primarily from production processes; air and noise pollution result about equally from both. For example, both industrial wastes and the residues from washing dishes flow into sewer systems and then into our water supplies. Automobiles, smokestack industries, and coal-fired electricity generation all contribute to the smog that engulfs many major cities and results in corrosive acid rain that falls on even some remote regions of our world. Many forms of production generate external costs. Examples include noise pollution near airports, unsightly billboards and junkyards, and factories that belch noxious smoke.

External costs cause the private market to oversupply the good because full costs are not borne by customers. That is, the social costs of production (total private costs plus any external costs) are not charged to consumers. If consumers are compelled to pay full costs, less is produced and consumed When a pollution charge is imposed, producers will seek ways to reduce their level of pollution if this reduces their total costs, which now include any external costs.

Could any lone individual reduce, say, pesticide pollution? You might pay farmers to stop or sue for damages. But lawsuits often involve transaction costs (attorney fees, etc.) that exceed the damage done. For example, individually suing all air polluters in Los Angeles would be very costly relative to the potential personal recompense for the harm done. People may seek legal remedies, however, when damages are extreme. The key is to force each firm to internalize (fully consider) the costs of pollution to innocent third parties.

If each buyer of a good pays full production costs, including environmental damages, then externalities are internalized, yielding optimal amounts of production and consumption.

Consider such problems as drunk and reckless drivers, loud neighbors who party until dawn, violent criminals, or litterbugs. These are market failures in the sense that consumption-based external costs are imposed on other people. Similar annoyances and dangers might be even more common in a pure laissez-faire society. Many analysts, however, view these as examples of government failure because one of government’s basic tasks in a market economy is to protect broad legal rights to property, which may include rights to peaceful and tidy neighborhoods and safe streets. Society has tried to control tendencies to overproduce external bads through zoning, social regulation, or other legal sanctions.

Summary:

Purely private markets produce too much (or too little) of a good when external costs (or benefits) are present. Externalities cause market failures, because people tend to weigh their private costs and benefits far more heavily than the costs borne or benefits received by outsiders. People maximize their personal welfare by equating the marginal private benefit from an action with its marginal private costs. This is quite rational, because trying to identify and negotiate with any potential third parties may be prohibitively costly and because nonexclusivity for environmental quality would make such negotiations futile. Thus, market demands mirror marginal private benefits, while market supplies reflect marginal private costs.

Society tries to compel decision-makers to internalize externalities by assigning certain legal rights, through taxes or subsidies, or via mandates or prohibition. Pollutants are the most conspicuous examples of negative externalities. Firms ideally internalize any pollution costs, so consumers ultimately pay full production costs: private plus external costs. The growth and diverse characteristics of pollution have stimulated numerous public policies.