Term Paper

Internalizing Externalities in Bangladesh Context

Name: Md. Rafiul Islam

Roll No. 102

Contact Number:01704087976

Email:[email protected]
Introduction: An externality is an outcome that results from a transaction between two parties that
directly impacts a third party. An externality occurs when a human does something that affects the
well-being of a bystander without being compensated or paying for it. The unrecognized effects of
one person's actions on bystander well-being. An externality is an effect that results from a
transaction between a buyer and a seller that directly impacts a third party. The socially optimal
quantity in a market is less than the equilibrium quality if an activity has negative externalities, like
pollution. The socially optimal quality is higher than the equilibrium quality if an activity produces
positive externalities, such as technological spillovers. when the market failures are classified as
externalities, a broad category. if the bystander suffers a negative effect. We refer to it as a negative
externality. A positive externality is one that is advantageous. When externalities are present,
society's interest in the result of a market goes beyond the welfare of buyers and sellers who actively
participate in the market to also include the welfare of bystanders who are indirectly impacted. The
market equilibrium is inefficient when there exist externalities, as in the case of consumers and
sellers who fail to consider the external implications of their actions when determining how much to
demand or provide. Both negative and good externalities are present around us. It has a good impact
when it increases market efficiency, and a negative impact when it doesn't. Determining whether
something is positive or negative is therefore crucial.

Positive Externality: An activity's good impact on an unrelated third party is referred to as a positive
externality, also known as a "external benefit," a "external economy," or a "beneficial externality." It
can occur on either the production side or the consumption side, similar to a negative
externality. Positive consumption externalities occur when an individual's consumption benefits
others but the individual is not compensated by those others, whereas positive production
externalities occur when a firm's production increases the well-being of others but the firm is not
compensated by those others.

Examples of positive externalities:

 A beekeeper who raises bees to produce honey. The externality of such action is the bees'
pollination of nearby crops. It's possible that the value created by pollination is more
significant than the value of honey that has been gathered.
 An industrial company that trains its staff in first aid to improve workplace safety.
Additionally, it might prevent deaths outside the factory.
 Historic buildings that have been restored might attract additional tourists and customers to
the area and promote nearby bussiness.
Negative Externality: An economic action that has a negative impact on an unrelated third party is
referred to as a negative externality, sometimes known as a "external cost" or a "external
diseconomy." It can happen either at the time of producing or using a good or service. Because it
imposes costs on individuals who are "external" to the producer and consumer of the polluting
commodity, pollution is known as a negative externality. The effects of production and consumption
on the environment are a major source of negative externalities.

Examples for negative externalities:

 Fossil fuel combustion produces air pollution. Crops, materials, (historical) buildings, and
public health are all harmed by this activity.
 Industrial effluents can contaminate waterways and endanger humans, animals, and
vegetation.
 When more people use public roads, road users experience congestion costs such as more
waiting in traffic and longer trip times. Increased road users also increase the likelihood of
road accidents.

How To Internalize Externalities: Internalizing the externalities means altering incentives so that
people take account of the external effects of their action. It gives buyers and sellers in the market an
incentives to take into account the external effects of their actions. Negative externalities lead
markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to
produce a smaller quantity than is socially desirable. To remedy the problem, the government can
internalize the externality by taxing goods that have negative externalities and subsidizing goods that
have positive externalities.

Negative Externality In Bangladesh Context: Bagladesh is infested with negative

externalities.some are as follows:

1.Traffic Congestion: If you drive through busy city of Bangladesh like Dhaka, you will find long
queue on the road, resulting unbearable sufferings and wastage of time. Dhaka is listed among the
heavy traffic congested cities in the world. Traffic consumes time, energy and patient. As a result of
this traffic, people cannot reach their desired destination timely. If you ever have ever been stuck in
bumper to bumper traffic, you have probably wished that there were fewer cars on the road. Because
of too many cars on the road, the probability of accidental incidents rises high. Cars cause smog.
Moreover, the burning of fossil fuel such as gasoline is widely believed to be the primary cause of
global warning.
2.Water pollution: Another externality in the context of Bangladesh is widespread is the pollution
of water In Bangladesh, Industries are established on the bank of rivers. As result of this, everyday a
huge quantity of industrial effluents is directly discharged into the river. The people who use the
water of river got infected with various types of diseases.

3. Deforestation: Wood is an essential thing which is used to make furniture that people use to
furnish their houses. The widespread use of wood to make furniture requires huge quantity of wood.
To get huge quantities of wood, we need to cut a huge number of trees. As a result, deforestation
appears. Deforestation cause lower rain and higher temperature in atmosphere. Lower rain hampers
the natural activities of agriculture.

4. Air pollution: Air pollution may be caused by factories, which release harmful gases to the
atmosphere. Some of the gases include carbon monoxide and carbon dioxide. The destructive gases
cause damage to crops, buildings, and human health. The high concentration of greenhouse gases in
the atmosphere affects the global climate and brings about extreme heat waves, rising sea levels,
intense hurricanes, graded air quality, and droughts. The release of toxic gases into the atmosphere
adversely affects vulnerable populations such as children, the elderly, and patients suffering from
asthma and heart diseases.

5. Noise pollution: Noise pollution caused by loud music from a casino or nightclub may also affect
third parties who are not part of the revelers dancing to the music. Loud music may be mentally and
psychologically disruptive, especially to children who are yet to adapt to the surrounding
environment. Also, noise pollution may cause sleep deprivation and affect the productivity of nearby
residents and businesses.

Internalizing The Negative Externalities in the Bangladesh context:

Corrective tax: Government can play a role in reducing negative externalities by taxing goods when
their production generates spillover costs. This taxation effectively increases the cost of producing
such goods. The higher cost, then, better reflects the true cost of production because it includes the
spillover costs of, say, pollution. So, such taxation attempts to make the producer pay for the full cost
of production. The use of such a tax is called internalizing the externality. For example, let's assume
the cost of producing the widgets noted earlier is two dollars per unit, but an additional 20 cents per
unit had been shifted to society as a negative externality in the form of dirty air. The government
could place a 20 cent tax on each widget produced to ensure that the firm pays the actual cost of
production-which is now two dollars and twenty cents, including the cost of the negative externality.
As a result of the higher cost of production, the firm will reduce its production of widgets thus
reducing the level of pollution. Similarly to get rid of deforestation, government can impose tax on
wood trade. The government can achieve whatever level of wood trade it wants by setting the tax at
an appropriate level. The higher the tax, the larger the reduction in wood trade. If the tax is high
enough, the wood trade will close down, reducing deforestation to zero.

Command-and-control regulation: Command-and-control regulation sets specific limits for

pollution emissions and/or mandates that specific pollution-control technologies that must be used.
command-and-control regulation is inflexible. It usually requires the same standard for all polluters,
and often the same pollution-control technology as well. If the government of Bangladesh wants to
control the wastage discharged into the river, they can set limits of wastage that a factory can
discharge into river. In case of breaking limits, government can charge 50 dollars per unit of wastage
discharged into river. Similarly to get rid of traffic, government can set the limit of vehicles that can
be run everyday in the road of Dhaka. command-and-control regulation offers no incentive to
improve the quality of the environment beyond the standard set by a particular law. Once the
command-and-control regulation has been satisfied, polluters have zero incentive to do better.

Positive Externalities in Bangladesh Context:

When you complete higher school, you'll reap the benefits of your education in the form of better job
opportunities, higher productivity, and higher income. A technical degree or college education will
further enhance those benefits. Although you might think you are the only one who benefits from
your education, that isn't the case. The many benefits of your education spill over to society in
general. In other words, you can generate positive externalities. For example, a well-educated society
is more likely to make good decisions when electing leaders. Also, regions with a more-educated
population tend to have lower crime rates. In addition, more education leads to higher worker
productivity and higher living standards for society in general. Although education has many
spillover benefits, providers of education do not receive all the revenue they would earn if the full
benefits of the transaction were internalized. To state it differently, producers of education are not
fully compensated for the benefits that spill over to society. As a result, producers of education will
likely under produce education

Encouraging Positive Externalities:

Government can play a role in encouraging positive externalities by providing subsidies for goods or
services that generate spillover benefits. A government subsidy is a payment that effectively lowers
the cost of producing a given good or service. Such subsidies provide an incentive for firms to
increase the production of goods that provide positive externalities. And, because the spillover
benefits go to society, government subsidies are a way for society to share in the cost of generating
positive externalities. After all, society pays the taxes that fund the subsidies. Regarding education,
because the government subsidizes public education, a greater quantity of education is produced and
consumed and society reaps the spillover benefits.

Conclusion: An externality is determined positive or negative based on whether costs or benefits

spill over. Imagine this scenario: Your neighbor buys a dog, feeds the dog, and pays all of the
expenses to care for the dog. In other words, your neighbor is bearing the explicit costs of dog
ownership. Your neighbor also receives benefits from the dog, such as companionship and home
security. But, what if the dog spends most of the night barking outside of your bedroom window,
depriving you of valuable sleep? In this case, you would be bearing some of the costs of your
neighbor's dog ownership-and that would be a negative externality for you. You could call your
neighbor and try to reach an agreement. But, if that weren't successful, you might call the police,
who may fine your neighbor. You could think of that as a type of corrective tax.On the other hand,
let's assume your neighbor's dog doesn't keep you awake at night. Instead, Fido is perfectly quiet and
only barks when suspicious looking strangers come near your homes. Now the dog is providing you
with the benefit of home security without you having to share in the cost of the dog-you receive a
positive externality. You might choose to "subsidize" Fido by taking care of the dog when your
neighbor is away or by giving the dog a treat from time to time.To summarize, the costs and benefits
of transactions for goods and services are often contained between the producers and consumers, but
sometimes costs and benefits spill over to third parties. A negative externality exists when a cost
spills over to a third party. A positive externality exists when a benefit spills over to a third-party.
Government can discourage negative externalities by taxing goods and services that generate
spillover costs. Government can encourage positive externalities by subsidizing goods and services
that generate spillover benefits.
References:

1.N.Gregory Mankiw,"Principles of Economics"7th edition, 2018,P(197-213)

2.Robert S.Pindyck and Daniel L.Rubinfeld,"Microeconomics"9th edition, 2021,P.(675-701)

3.26,October, 2022,The Prothom Alo.