PART 1: Does cost/benefit analysis to reduce or eliminate costs to third parties

Question

PART 1:

Does cost/benefit analysis to reduce or eliminate costs to third parties work? According to your textbook author, when a cost is imposed on a third party such as the population affected by a garbage dump site in their neighborhood, moving the cost directly to the producer of the good/service (dumping services) will reduce the equilibrium quantity and increase the equilibrium price.    Why does this cost/benefit approach disproportionally create more pollution (noise, air, water, soil, sight, smell) in poor neighborhoods as opposed to wealthier ones? Is this a fair way to deal with externalities? Why or why not?

http://www.huffingtonpost.com/loraine-boyle/no-garbage-dumps-in-resid_b_885716.html

PART 2:

Give an example in your own life where a cost is imposed or benefit bestowed on you as a third party. Should the externality be corrected? Why or why not? Support your answer with readings from this week

After Sunday, please post to two peers supporting, critiquing or questioning their examples. It is important to post on at minimum two separate dates/times. This ensures a rich conversation where students have time to reflect on what they and others have posted.

Chapter 10-11 in Mankiw and Dollars & Sense

Explanation / Answer

The first part of your question can be answered based on a very popular theory from political economics, the bargaining theory. Wealthier people have greater bargaining power as against poor people (this may be because of them being unaware of their rights, illegal settlements, illiteracy, etc.). As wealthier power people have greater bargaining power they can impose a high cost (sometimes even a premium) on producers of negative externalities. Less bargaining power of poor people make them more vulnerable and marginalised. Hence, producers at times find it more economically convenient and beneficial to shift their unheealthy environmental practices to areas with majority of poor people. A real time example of this is the shifting of secondary sector activities by develed countries to developing countries like India, China etc.

For the second part a real time example could be smoking wherein, the active smokers imposes a negative externality on his immediate surrounding people forcing them to be passive smokers and making them vulnerable to respiratory disorders and cancer. This externailty needs to be mitigated by imposing more heavier taxes on smoking proidcuts as in Singapore. The tax benefits of the state from the same can then be utilized to improce health care facilities and benefits for non-smokers.

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