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Production Activities that Result to Air Pollution
Pollution is an example of a negative externality, and it emerges from production processes that do not put in place measures aimed at its reduction. Indeed, when setting up the prices of commodities, companies and business organizations do not have a provision for the externalities or the third party costs of their products. Nonetheless, there are two major types of expenses an organization can incur. These costs are the private and the external costs. The private costs are the expenses that an organization incurs during the process of production.
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On the other hand, it is the community that is responsible for incurring the external costs. Indeed, it is possible to use the supply and the demand curve to efficiently explain the private and the social costs that an organization incurs, during the process of production. To efficiently illustrate this assertion, there is a need of using a hypothetical company that manufacturers televisions. Figure 1 is a table that indicates the quantity supplied and demanded at various price levels, before and after the organization factors in the external costs:
| Price | Demand | Supplied (private costs alone) | Supplied (pollution considered ) |
| $ 60 | 50 | 40 | 30 |
| $ 65 | 45 | 45 | 35 |
| $ 70 | 40 | 50 | 40 |
| $80 | 30 | 60 | 50 |
Figure 1: a hypothetical explanation of the different quantities of products supplied, based on the introduction of pollution and non-pollution costs.
From this graphical illustration, it is possible to note that when the prices of a product are high, then the demand for such a product will decline. Nonetheless, a higher price of a product will result in an increase in the supply of the television products.
However, when business organizations have to factor in the external costs of production, the chances are high that they will reduce the number of products supplied. For instance, the production process of producing television requires the use of chemicals, energy, and metal. When these elements are emitted into the atmosphere, they may create a cost of about $ 5. Indeed, these are the medical costs incurred because of the injury to people, destruction of the habitat and properties.
In a market industry where the government does not impose the external costs, it is cheaper for these organizations to produce televisions. However, when the government imposes external costs, it is more expensive for the firms to manufacture the products. Therefore, the supply curve will shift by the value of cost increased. Therefore, from the figure above, the hypothetical supply curve of the televisions whose costs include the value of externalities is on a decline. The reason is because it is more expensive to produce the product.
The grounds of the existence of the supply curve are the choices that production companies make, factoring in their marginal costs. On the other hand, the demand curve is influenced by the benefits a consumer will get, for using a product. If the externalities do not exist, then, the private costs that an organization incurs, is similar to that of the social costs. In reality, this is not true. Every production process has some externalities. Therefore, a supply curve that does not factor in the externalities of the production process does not represent the social costs of the organization.
China and Pollution Reduction
Air pollution is one of the significant problems that are facing China. From the data produced by BBC News, the rates of pollution in China are very high. The table below provides a graphical image of the level of air pollution or its quality in Beijing.
| Hazardous Air Quality | Unhealthy | Very Unhealthy Quality | Good quality | Moderate Quality |
| 4% | 49% | 14% | 2% | 18% |
Figure 2: An image is showing the level of air quality of Beijing. Source of data: BBC News, courtesy of US Embassy in China.
From the above figure, it is possible to assert that the quality of air in China is bad. A high of 49% indicates that the air pollution is at a catastrophic level. Thus, the need of coming up with policies aimed at reducing these rates of pollution.
In this regard, for purposes of preventing the rates of air pollution in China, the government used the National Air Pollution Act. The primary aim of this policy was to reduce the amount of coal that companies in China are using in their industries (BBC News, 2016).
Moreover, household industries also have a duty of reducing the use of coal as a source of energy. The reason for focusing on coal reduction is because it is the largest and single most factors responsible for causing air pollution in China. For instance, the policy puts a cap on the amount of coal that various states or province in China have to consume. These regions include Beijing, Shanghai, and Guangzhou (Greenstone, 2018). The country also managed to reduce the production capacity of its iron and steel industry.
Moreover, in a report provided by the New York Times, the policy of coal reduction, as a significant method of fighting air pollution is a success in China. The reason is that the Chinese consumption of coal declined since 2000. For instance, cities such as Beijing and Hebei managed to reduce the rates of their environmental destruction.
The Trade and Cap System
Indeed, this is one of the best methods of fighting air pollution. Under the cap concept, the government places a limit on the amount of carbon that organizations within the economic system can emit. Over a period, this is a cap that gets tough. Under the notion of trade, companies are willing to sell and buy the permits they have, which allows them to produce a certain ton or amount of carbon.
Therefore, through the trade system, companies that pollute the environment are forced to buy permits from companies that need less carbon for production purposes. Thus, the law of demand and supply is applicable in this situation. Indeed, because polluters have to buy permits for production purposes, the rates of their production will decline, and this will result to a reduction in air pollution. Take, for example, the costs of producing 1 tons of carbon is $ 10. If a company uses 20 tones to produce a product, then, the costs will increase by $ 200. In this regard, the costs of the production process will increase by $ 200. Figure 4 provides such an hypothetical situation: The assumption used in creating this figure is that it involves 20 tones to produce a product.
| Cost per tonne $ | Production Costs |
| 10 | 200 |
| 20 | 400 |
| 30 | 600 |
Figure 3: Graphical Illustration of the increased costs of production because of the cap and trade policy.
Based on the laws of supply and demand, an increase in production costs will result in a decline in the number of products produced. Moreover, the prices of these products will increase, resulting in a reduction in demand.
Through this process, the cap and trade policy manages to reduce air pollution. Nevertheless, in comparison to the policies used by China to reduce environmental pollution, the trade and cap policy is the most effective. The reason is that it affects the supply and demand of the products. Thus, the markets will correct themselves. However, China banned the use of coal, and the result was shortages of energy within the industry.
- BBC News. (2016, January 20). What is China doing to clean its air?
- Greenstone, M. (2018, March 12). Four Years After Declaring War on Pollution, China Is Winning.
- Wong, E., & Buckley, C. (2015, September 21). Fading Coal Industry in China May Offer Chance to Aid Climate.