Please note that this question requires substantial research (see the assessment criteria below). a)Explain what negative externalities are, and why there may be a case for government intervention to...

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a)
Negative externality: an overview
Negative externality, as explained in economic literature, occurs when the action of any individual or firm impose a cost on third party. More specifically, a negative externality arises when the decision of an individual or the firm does not pay the full cost of the society. When production or consumption of certain goods cause an external cost to third party who is not involved in the transaction, it leads to negative externality. The price of goods and services are determined by the intersection of demand and supply and consumers’ willingness to ay but that do not account the cost that are imposed to the third party. The cost to the third party leads to unintended consequences known as negative externality. The problem of externality emerges when there is a difference between the social cost and the private cost. (Sallis, 2016)
Air pollution is a good example negative externality since it creates huge cost to society by doing significant harm to human health and environment. Fir example, the emission of hazardous gas from a steel factory pollutes the air quality thereby leads to negative externality. The polluted air has a spill over effects to outside parties that creates market failure. The people in neighbouring communities may experience several health issues and suffering from dreadful diseases. But the firm does not pay for such damage. (Sexton, 2010)
We can explain the negative externality problem with the help of a diagram:
Marginal social cost is the summation marginal private cost and marginal external cost. While the private market outcome is Qc, socially optimal level of outcome s Q*. The price will increase from Pc to P*.
Government intervention to internalize the negative externality:
There are various policy interventions through government can co
ect the negative externality problems.
Pigouvian Tax:
Economist A.C Pigou has advocated a solution to the problem of negative externality through imposition of tax on the firms based on the external cost generated by them, thus internalizing the externality and reimbursing the society for the external cost. This tax is known as Pigouvian tax where the tax per unit is equal to the marginal external cost. The optimal tax t*= MEC( Q*) . (Hackett, M.E Sharpe )
Pigouvian tax would help to shift the marginal private cost curve upwards thereby eliminates the deadweight loss. For example, if Pollution tax is imposed on the steel factory then it would produce efficient level of output.
When negative externalities present in the production firms produce more than efficient level Q*. When Pigouvian tax t is imposed, firm’s private supply curve will shift leftwards towards MSC curve. Firms have an incentive to reduce the production and produce at the socially efficient level. With the tax in place the new market outcome will be Q* which is socially efficient. Setting the tax equal to the marginal external cost, Pigouvian tax can internalize the externality problem. (Neva Goodwin, 2014)
Regulation:
Government can put regulations and banned certain activities that cause pollution. With the regulations, Government can also force the firm to adopt specific technology to control emissions. The purchase of new technology will increase the cost of production of the firm as a result the private cost will shift to the left and socially optimum level will be restored. (N. Gregory Mankiw, 2006)
Pros and cons:
Pigouvian tax will generate tax revenue that can be utilized in other social welfare projects. The problem with regulation is that the regulators have to know the best available technology for each and every industry. Pollution tax is more efficient then regulations, most economists agreed. The tax would provide the firms greater incentive to adopt the new technology to lower the emission level in their plants. Their key intention is to lower the tax they have to pay for emitting gases. On the other hand, regulations provide little incentive to firm to further lower the emission level one it reaches to the predetermined level set the regulatory authority. (Hackett, M.E Sharpe )
Real life example: Congestion fee at London
In order to internalize the negative externality, congestion price is imposed to the drivers. For example, London has introduced a congestion charge. Congestion charge is the fee that is imposed on the vehicles that are operating through charging zine between 7.00 am to 18:00 PM from Monday to Friday.     The congestion pricing concept based on the idea that drivers are forced to pay for the environmental cost or the negative externalities they create. It will help to reduce the congestion that will in turn reduce the air pollution. If the revenue generated from the congestion charge are spent on alternative transport system then it will provide a greater economic gain. (MISRA, 2016)
(b)
Air pollution in Delhi: A case study in India
The air pollution level in Delhi is the pertinent example of negative externality. Delhi is identified as one of the worst polluted capital cities in the world. The air pollution and the unhealthy air quality index of the city is a wo
ying concern today for the welfare of the people of Delhi. Growing population in capital city, massive rise in vehicles, unplanned development of factories and the emission of poisonous gas from burning of city ga
age in four landfills are the some of the key factors that has...