The Rocky Mountains of Markets

Any business, small or large, has always had an impact on the market; this is understandable. However, this activity also creates uncompensated impacts on the well-being of bystanders, these are called externalities. These externalities could either be positive or negative; nevertheless, no matter what it might be, this aspect distorts the economy. An example of a negative externality is the pollution a company may produce; on the other hand, an example of a positive externality is the research of a company about new technologies.

In order that these externalities may be corrected, the government may impose two possible market-based policies in which the company will be subject to. The first one is the imposition of corrective taxes and subsidies. Corrective taxes are taxes that are designed to force a company to take note of the negative externalities that it is producing; these taxes are meant to deal negative externalities. A corrective tax should always be equal with the cost of the externality.

On the other hand, are subsidies that reinforce positive externalities. These subsidies should, just like the corrective taxes, compensate for the cost of eth positive externality. The other method the government might use in controlling these externalities are the tradable pollution permits it sells to companies. These permits are designed to regulate the amount of pollution a company might produce. Indicated here, is the maximum amount of pollution that is allowed; exceeding this will be a violation of the law.

A simple business always affects other people. Therefore, business owners should always be reminded to take note of these possible externalities in order that they will not be subject to the law.