Production Externalities Taint China's Growth

This article from the New York Times describes a classic case of an externality in production. The frantic pace of economic growth in China, particularly in the manufacturing sector, has wreaked havoc on the environment. Smog contaminates the air in the most populated cities, and air pollution has even led citizens to wear masks outside. Of immediate concern is the country’s high consumption of coal. Perhaps most disturbing is a 2010 report attributing the poor environment to 1.2 million early deaths that year. In response to increasing concern, the Chinese government has announced a plan to reduce air pollution by restricting the utilization of coal and the use of cars that are not environmentally friendly.  However, environmental groups find the new standards are not far reaching enough.

China’s situation also demonstrates an element of the prisoner's dilemma, because each factory can be seen as having a dominant strategy of using cheap, environmentally hazardous methods of production in order to compete. However, with government intervention now changing incentives, production methods will hopefully move towards a Pareto optimal outcome.  

Although not mentioned in the article, the Chinese government could also consider auctioning off “licenses to pollute” as a strategy to clean up the environment. This is an idea we discussed in class that has been researched extensively in the UVa Economics Department. An auction would benefit the government both by fostering innovation in production and raising revenue at the same time. 

Benzene Emissions in Philadelphia Pose Cancer Risk

     I usually try to read the Philadelphia Inquirer every few weeks or so, just to keep tabs on what's happening back home. When I opened the website tonight I noticed an article entitled 'Greenspace: Proximity to Industrial Plants' Benzene Linked to Cancer'. From the title, it sounded like this article would be a perfect example of a negative externality of production, as large factories and refineries in the southern section of the city had been reported to have been emitting a toxic chemical known as benzene, that health experts have labled a carcinogen. This would fit the paradigm of the negative production externality, as the negative effects of the benzene on surrounding residents raises social marginal costs in the market for the refineries' output above allocatively efficient levels. This cost was being imposed on South Philly residents who were not parties to the exchange in which benzene was produced.
      However, after reading the article, unlike the title misleadingly suggests, the main culprit in benzine emissions is not the refineries, but is instead city traffic, which accounts for triple the amount of benzine emissions in the city. So, while there is definitely a negative production externality at play here, the bulk of the benzine emissions is actually a negative externality of consumption. City drivers are engaging in an activity that, like smoking, imposes an externality on the rest of the city's residents. The result is that the social marginal cost is higher than the private marginal cost to the individual drivers (gas, insurance, car payments) and the quantity of driving 'consumed' is higher than what an economist would consider allocatively efficient.