Asking to be Taxed and Regulated

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Alexander Zouev

‘Asking to be Taxed and Regulated’

        This article focuses on the concept of negative externalities of pollution from a coal burning company called Cinergy and how they plan to deal with this problem.  An externality occurs when there is a divergence between social and private costs and benefits.  The private cost is the price of an activity to the individual producer – in this case the cost of running the power plants that Cinergy owns.  In the diagram below we can see that free market allocation (considering only the private costs to Cinergy) would settle at q0.  

The social cost however is the total cost of an activity to both the individual consumer/firm and rest of society as well.  Social cost is equal to the private cost plus the externality. Negative externalities are spill-over effects that arise from the production or consumption of goods and services that have had no specific compensation. With negative externalities, like pollution, the social cost is greater than the private cost.  The 56 million metric tons of carbon dioxide that the company Cinergy spews is the negative externality in this article and its costs are borne by society as a whole.  The socially optimum allocation is at q1 where the social marginal cost = social marginal benefit.  In the diagram we can see that firms such as Cinergy will not consider social costs and will overproduce. Cinergy produces too much compared to the socially optimal level. In the diagram we can see that on units q0q1 the social marginal cost is greater than the social marginal benefit, therefore there is allocative inefficiency (market failure).  Allocative efficiency is where no resources are wasted – when no one can be made better off without making someone else worse off.

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When the CEO of Cinergy, Jim Rogers, claims he ‘is an outspoken advocate of regulating carbon and imposing a price on emissions’ he is admitting that he realizes the pollution that his company is responsible for.  His proposals of a ‘regulatory scheme that would force power companies to cut carbon emissions’ and spending ‘$1 billion to increase the use of cleaner-burning natural gas’ can be seen as an attempt to get closer to the social optimum level of production.  In the diagram, we can see that if Cinergy cuts its carbon emissions and cuts reliance on coal from 87% to ...

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