You may have heard of the air pollution in China. Beijing experienced the worst smog and fogs last year, which led to school canceled and flights delayed. Thus Beijing was developing a project that named Blue-Sky solution to protect people from poor air quality as smog worsened. I heard that many people wore face masks during heavily polluted days due to personal health. PM2.5 (which is harmful particulates measuring 2.5 microns or larger—per cubic meter of air) concentration levels in Beijing exceeded World Health Organization air quality guidelines. Authorities and entrepreneurs have paid a great deal of attention to the environmental problem. The government is committed to rectifying the problem, and Beijing will allocate 760 billion Yuan (about 124.64 billion dollars) to improve the city’s air quality by 2017. But the economic and environmental crises are intertwined.
The economic activities of production and consumption require the use of energy, which affects the environment in terms of air pollution, and water pollution. Chinese economic growth model results in heavy industry activity and also contributes heavily to the degradation of the air quality. Some factories surrounding the capital, Hebei for instance, a huge steel-producing region, have been forced to close temporarily following the raising of the orange alert. This is because the factories emitted too much pollution and the government needed to step in to prevent them from doing so. The exhaust from the factories is negative externality and the cost to the whole society of producing steels is definitely larger than the cost to the steel production. This negative externality caused by the energy industries results in market inefficiency. Market cannot allocate goods and resources based on their true value or true cost. Energy market without government regulation does not account for the social cost of energy production, namely the health risk of breathing smog. In order for the market to be more efficient, the government is trying to increase industries’ production cost by either adding fines to pollution or instate mandatory filter systems. As a result, the supply curve would move to the left, closer to the supply curve that reflects the social cost caused by pollution.
China is also using economic incentives to solve the problem of externalities resulting from the use of energy. China burns a large number of coals that are major cause of air pollution. To reduce the use of coal, the government has introduced a tax on high-sulfur coal and encourage a switch a cleaner burning fuels. The policies provide incentives for lower emissions or a charge from harmful to benign emissions. It is an approach to correct externalities: charge the cost to the producer or consumer who is responsible. Therefore, it is effective to regulate the use of energy by law or by economic incentive such as corrective tax to reduce production emissions.
Finally, I think it is important to “internalize externalities” because private solutions work sometimes if there is a universal moral code in terms of environmental protection.