Why Do External Diseconomies Like Pollution Lead To Economic Inefficiency?
Take a hypothetical coal burning electric utility. Dirty Light and power generates an external dis-economy by spewing out tons of noxious sulphur dioxide fumes. Some of the sulphur harms the utility, requiring more frequent repainting and raising the firm’s medical bills. But most of the damage is external to the firm, settling throughout the region, harming vegetation and buildings, and causing various kinds of respiratory ailments and even premature death in people. Being a sound profit maximizing enterprise, Dirty Light and Power must decide how much pollution it should emit. With no pollution clean up, its workers and plant will suffer. Cleaning up every molecule, on the other hand, will require heavy expenses for low sulphur, cleaner fuels, recycling systems, scrubbing equipment, and so forth. A complete clean up would cost so much that Dirty Light and Power could not hope to survive in the market place. The managers therefore decide to clean up just to the point where the benefit
