Commentary fact that production with unregulated pollutionCommentary fact that production with unregulated pollution













Commentary on: Clean fuels standard coming soon but
maybe not this fall: McKenna

This article
provides information regarding a proposed solution to high pollution levels in
Canada. High pollution levels are a global issue for many reasons; the
production of greenhouse gases has been linked to climate change, and consumers
often end up paying more in the long run to use disposable products or
semi-permanent products in the absence of an eco-friendly alternative.
Consumers also indirectly pay for the damages that high levels of pollution can
cause through their taxes to the government, which the government in turn
spends on research towards climate change and recovery.  The trends of this article can be illustrated
by a negative externality of production graph. A negative externality of
production will have external costs for consumers- in this case, the pollution
is an external cost of the producer.

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This graph demonstrates
a negative externality of production. Negative externalities of production
occur when a third party suffers from the economic relationship between
producer and consumer. Externalities are a type of market failure. Market
failure refers to the failure of the market to deal with resources efficiently:
the goal of all economic systems. In failing to allocate these resources
efficiently, there are unforeseen consequences on a third party, called
externalities, which in this example include the people forced to consume the
pollution even if they do not consume the product. In the graph, we can see
that the Marginal Social Cost (MPC) is higher than the Marginal Private Cost
(MPC). This is because of the fact that production with unregulated pollution
has a higher social cost (cost toward a third party) than the cost the producer
incurs. This cost generates welfare loss, which is the amount of people that
decide the social cost is too high to consume these products with high levels
of pollution. If there were no externality here, MSC and MPC would be equal.
This would require the firm to pay for the damages of pollution on the
environment (social cost).

There are other
factors in this example at play, however. There are inelastic goods that would
not have as much of a welfare loss- this is because inelastic goods are not
responsive to price change. Today, cars are quite necessary/inelastic. Furthermore,
there are other factors at play when deciding what the consumer chooses to
consume, like the amount of substitute goods available, and the period in which
the consumer has to pay for the item. 

There is not just
proposed solution alluded to in the article; the Clean Energy Canada campaign
incorporates all the usual ways to correct market failures like a negative
externality of production, making sure that the goal is to make MSC equal to
the MPC. To do this, the Clean Energy Canada campaign is mandating that
producers incorporate more “ethanol, biodiesel and renewable diesel into
existing fuels…” to lessen carbon concentration in the production of their
goods. Using different types of fuels could reduce carbon intensity either at
the cost or benefit to the producer (depending on the individual), so keep in
mind that the MSC and MPC would still have to be equal to eliminate welfare
loss. The article also proposes taxation, which is another way to eliminate a
market failure. Once we focus on the direct raise in price of production because
the producers pick up the cost of pollution and add it to the cost of
production, the MSC and MPC would ideally be equal. This would eliminate the
welfare loss, which includes the people that deemed the social cost of
pollution too high to participate in these economic transactions.

   Additionally, we can infer what this increase
in price due to the increase in the costs of production of fuel will do to the
market for electric or alternative vehicles that do not require fuel. The Law
of Demand states that if the price of a good increases while all other components
remain the same, the quantity that is demanded will decrease. Since the price
of maintaining a vehicle with gasoline has increased and no other factors have
changed, we can infer that the quantity demanded of electric vehicles will
increase to account for the decreased quantity of regular cars demanded.