jsmoxon/Negative Externalities

## Negative Externalities
Milton Friedman said it best: no single person could make a pencil. To do so one would have to smelt steel to build a saw to cut a tree, produce rubber for an eraser, mine graphite, etc. And yet, someone decided it was worth all that trouble provided they could sell it for a mere $.13.

The price of a good signals the cost that the producer paid to make the good to consumers.
But what if that rubber factory produces toxic waste and dumps it into an adjacent river? If you were a fisherman down stream you’d say that pencil cost you something. It cost you the fish you could otherwise catch and sell - and you won’t see a penny of that $.13!

The pollution that kills your fish is a negative externality - a cost associated with a good that is not reflected in the price and incurred by a party that did not agree to pay it. In this case: you – a person who receives no direct benefit from pencil manufacturing – bear a cost that you did not intend to – i.e. you can’t sell fish you expected to.

Several remedies exist, but Pigovian taxes are most popular among economists. A Pigovian tax is a tax on a good set equal to the negative externality produced by that good. If pencils kill fish, then a tax would be placed on fish equal to the price of fish lost. This discourages consumption of pencils and saves fish. These taxes are preferred to an outright ban of the offending product because they allow individuals to make their own choices about what to buy. While it is may be a tragedy that fish are killed by pencil production, the pencil does serve a useful role in society. Just ask Picasso!
	Milton Friedman said it best: no single person could make a pencil. To do so one would have to smelt steel to build a saw to cut a tree, produce rubber for an eraser, mine graphite, etc. And yet, someone decided it was worth all that trouble provided they could sell it for a mere $.13.

	The price of a good signals the cost that the producer paid to make the good to consumers.
	But what if that rubber factory produces toxic waste and dumps it into an adjacent river? If you were a fisherman down stream you’d say that pencil cost you something. It cost you the fish you could otherwise catch and sell - and you won’t see a penny of that $.13!

	The pollution that kills your fish is a negative externality - a cost associated with a good that is not reflected in the price and incurred by a party that did not agree to pay it. In this case: you – a person who receives no direct benefit from pencil manufacturing – bear a cost that you did not intend to – i.e. you can’t sell fish you expected to.

	Several remedies exist, but Pigovian taxes are most popular among economists. A Pigovian tax is a tax on a good set equal to the negative externality produced by that good. If pencils kill fish, then a tax would be placed on fish equal to the price of fish lost. This discourages consumption of pencils and saves fish. These taxes are preferred to an outright ban of the offending product because they allow individuals to make their own choices about what to buy. While it is may be a tragedy that fish are killed by pencil production, the pencil does serve a useful role in society. Just ask Picasso!