Air Pollution Linked to Higher Heart Attack Risk

Sixteen years of mounting scientific evidence are securing the idea that “specific forms of air pollution increase the risk of suffering a fatal heart attack, among other cardiovascular diseases.” If these particular toxins are present in the atmosphere, even at levels below the federal health standard, lifespan of the inhabitants near the source can be shortened by up to two years. One of 250 metropolitan cities, Salt Lake City has held long-term studies on the effects of the production of a factory which is thought to contribute to the majority of the city’s pollutant smog. When Salt Lake City’s steel-mill shut down for several months, the fatality rate of nearby neighborhoods “decreased by four to six percent. Once reopened, fatality rate increased to their previous levels.”
When a firm pushes costs onto a third party to minimize its costs and maximize its profits, it externalizes these costs. If these costs are harmful, for instance pollution of the environment, then the externalization becomes negative. Negative externalities of production are characterized by the over-allocation of the firm’s resources, and therefore are market failures. The steel-mill in Salt Lake City is a prime example of an externalizing firm. To avoid paying the costs of proper industrial waste disposal and newer clean machinery, the mill emits gasses and pollutants into the surrounding areas. As a result, the population and government ‘pay the price’ of the mill’s actions through medical bills for cardiovascular diseases and the cleanup of, for instance, the polluted water supply. The costs of the firm are the MPC and the society’s cost is the MSC.

The graph above shows the externalizing situation of the steel-mill in Salt Lake City. The marginal private costs are lower than the marginal social costs meaning that the society is paying for the majority of the externality whereas the firm is pushing the costs onto the public. Ideally, each market should perform at the socially optimal point, or where marginal social benefits equal the marginal social costs. This means that either the society or firm is paying more for the externality (therefore no externality exists). Although the costs at this point are higher and quantity produced is decreased, the benefits to society are higher. The negative externalizing situation is shown by the red lines. This is where the steel-mill is currently producing. The red area is dead weight loss (or welfare loss) which shows how extensively the social costs exceed the social benefits. This area is a visual representation of the extent of the externality which is taking place.
Solving a negative externality involves internalizing the costs so that they become private costs. This increases marginal private costs towards marginal social costs, in turn decreasing welfare loss and the externality. Essentially, fixing negative externalities of production ensures that the market produces nearer to the socially optimal point where no externality would exist. This is shown in the following diagram:

Above, marginal private cost has increased towards marginal social cost; nearing the socially optimal point. Note how welfare loss has decreased, signaling that the market failure severity has been minimized. This illustration applies, however, to only a few of the methods of solving a negative externality of producing involving pollution including per unit taxing. The market failure originates from over-allocation of resources. Per unit taxing can be set by the government onto the steel-mill to decrease this over-production by increasing the firm’s price to produce each unit. Due to the increase in production costs, the firm may have the incentive to find less costly methods of production.
Issues exist, however, that limit the effectiveness of the per unit taxing method. If a product has very inelastic demand, then the consumer will continue to consume the same amount as before the tax was imposed. Steel is a popular industrial product, so perhaps this could be a problematic factor.
For this reason, to internalize the steel-mill costs, it may not be wise to tax per unit. In order for the per unit tax to be effective on the mill, the elasticity of demand for the product must be less inelastic, meaning that demand will decrease quickly if price increases as the tax is set. The primary reason that the steel demand would become more elastic is the decreasing dependency of the population for steel. This is occurring slowly in the current economy as well; industries are always finding cleaner, more reliable and cheaper methods of production such as carbon-fiber structures and concrete-wood combinations.