Policies to reduce negative externalities Essay Example | Topics and Well Written Essays - 500 words

Policies to reduce negative externalities - Essay Example Also such a tax tries to compensate the situation where the cost to the society is more than the cost to the producer. This tax will ensure that the producer bear the full burden of the market decision taken by him. Such a tax might urge the plant to reduce its production or improve methods to contain pollution which might involve technological upgradation. Hence in case of such a policy the company bears the cost. This policy was practiced earlier with success but later replaced by pollution rights which ensure that the firm does not lose profits but can trade their pollution rights. However in such cases the gains to the environment is not much compared to the effect it has on minimizing cost to the firms. This policy has worked in case of Kyoto Protocol where the carbon taxes imposed is targeted at the producer causing the negative externality. Such taxes on emissions also encourage the development of alternative and renewable energy sectors. Also when a large organization is forc ed to cut down production it gives relief to the smaller organizations from a competitive pressure. Hence this tax can also help in bringing about a balance in the market to reduce inequalities. (Hackett 2001) The second policy that the company can adopt is that of setting caps and baselines.