Externalities can defined as the effect of a decision or purchase on a person or group who did not have a choice in the event and whose interests were not taken into account (Moffatt, 201). It also refers to the impact of consumption or production towards individual, household and firm but it not directly reflected in the transaction. In summaries, the third party which is not buyer or seller is affected from the production or consumption of the item in externalities. They are person who bear the impact of externalities such as air pollution. Externalities can divide into two parts which is negative externalities also known as spillover cost and positive externalities known as spillover benefit.
1.2 Negative Externalities
Negative externality is the cost to the third party where it is not involved in market (Moffatt, 2017). It also means costs due to an activity that affected to uninvolved party who did not choose to incur that cost. Negative externality will cause third party suffered as a result of economic transaction. Every transaction made by buyer and seller will have an affects. The negative affect which involved other party refer to this negative externality. In order to overcome negative externality, government intervention is required to control negative externality. It means, government can use regulation such as implement a law or use market solution.
1.3 Positive externalities
Positive externality is the benefit to the third party which is not involved in market (Moffatt, 2017). Either buyer or seller, they will not notice that their item will give an affect toward third party during transaction. This benefit will be inefficiency to the government because the amount of benefit received by third party was higher without paying to the government. it means, the impact will be experience by third party without noticed by seller or buyer and the number or benefit receiving cannot be predicted.
2.0 IMPACTS OF NEGATIVE EXTERNALITIES
Pollution can define as dangerous substance (solid, liquid, or gas) or energy (heat, sound, or radioactivity) into the environment which gave bad impact to the human health, harm ecosystem and use legitimate substance of the environment (Nathanson, 2017). In negative externality context, when both buyer and seller involved in market transaction, they should be negative impact to the third party as a result of transaction. The third parties who have to receive the consequences of the transaction need bear the cost of polluted from the item of transaction.
In Malaysia case, it can be seem in bauxite cases in Kuantan, Pahang. Since the demand of bauxite is high, the productions of bauxite become rapid and uncontrolled. The production team was unable to take precaution to overcome the environment from being pollution. The third party which is Kuantan residence has to bear the pollution which can endanger their health and air. They see red dust around Kuantan and the red water in river (Karim & Shah, 2016).
It proves that third party has to face the outcome from spillover cost. Since the pollution occurs, the third party will reduce their benefit. They will face negative impact from the pollution. Either they received bad environment or it affect their financial. From the bad environment, they could experience bad healthy, air, water and other that related to their daily activities. Meanwhile, in term of financial, the pollution may cause third party financial sources reduce. When the sources reduce, the third party may not be able to gain much income since they are unable to sell high resources for income.
2.2 Global Warming
According to timeforchange.org, global warming can define as the average temperature of the earth and ocean increases. It increases about 0.6°C for 20th century. The main reason for global warming was greenhouse effect where it traps carbon dioxide and other gasses into atmosphere. Usually, carbon dioxide resource was from fossil fuel, coal, oil and gasoline. In 19th century, the amount of carbon dioxide in atmosphere was 25%.
The consequences of global warming will cause increasing of global temperature. The scientist expected that global warming cause total rainfall will increase. This increasing will bring dangerous to agriculture sector because the rainfall is expected to be less in productive soil and much in less productive soil. This amount will cause agriculture product unable to growth normally and may produce bad plants.
In term of negative externalities, the demand for carbon dioxide product was increase. For instance, in Malaysia, the number of registered car in 2015 was 26301952 while in 2014, 25101192 (Jabatan Pengangkutan Jalan Malaysia, 2017). It shows the number was increased by 4.57% from 2014 to 2015. Since the number of vehicles increase annually, the number of carbon dioxide user also increase due to use burn fuel fossil in vehicle. Since the carbon dioxide user increase, the global warming occurs. The increasing of global warming will causing problem to the third party. The agriculture productivity will decrease, flooding frequently occurs due to sea level raise and any other damages. Every problem will affect third party. They will face the impact of global warming. They will lack of agriculture product, and might be difficult to deal with weather change which can harm their healthy. This entire problem is come from negative externalities. When buyer and seller not consider the impact of their action, the third party will received the consequences. They produce some product without having alternative to overcome the future affect and produce high quantity of product that suitable to produce in current situation.
It proves that global warming was an impact of negative externalities. Since demand and supply was exceeding the requirement, the unlimited production cause carbon dioxide rate in earth increasing dramatically. The impact was cause to global warming.
3.1 Strengthen the Current Law
Nowadays, supplier did not afraid to produce product that can harm humanity. This is because, the profit they gain is nothing to compare than fines that should pay if they get fines by authority bodies. They will do any method to produce their product as long it can bring tremendous profit to them. In Malaysia, according to Environment Quality Act (act 127), any action that can harm environment will be fine not more than RM100 000 or prison not more than 5 years (www.doe.gov.my). This fine seems lower compare than profits they gain that exceed million ringgit. For instance, The minister of the Natural Resources and Environment Ministry, Datuk Seri G. Palanivel has opened 43 investigation papers on open burning cases. Those convicted face a maximum fine RM500,000 and five years’ jail. The minister could also impose RM2,000 fine for smaller offences (www1.nst.com.my)
Current law should be strengthening where the person or company who oppose a law should be punishing heavier. The punishment should be something when someone tries to commit problem, they will consider the outcome since the punishment was heavier. For example, the fine should be a million and the prison punishment should be more than 10 years. This suggestion will cause the people may not try to commit problem. Authority body also need to seriously looking for guilty person so they will never able to move freely.
Meanwhile, strengthen the law will ensure everyone alert with the law. They will carefully observe the law and obey it. The impact of strengthen the law will bring more benefit to the third party. This third party will experience good quality of environment and able to preserve their resource so their income can be maintained.
3.2 Impose Carbon Tax
Carbon tax is an environmental fee levied by government on the production, distribution, or use of fossil fuels (West, 2017). It means, the tax will be charge based on content of the carbon in one production. This is an effective way to reducing global warming. If this tax implement, the price of energy and the production cost will increase. Since the price is increasing, the producer will try to use other alternative to replace the energy. It happens because the producers refuse to increase their cost which will lead to decreasing profit. They will switch to non carbon energy such as solar, geothermal and other. Indirectly, the user of carbon dioxide will be decrease and global warming could be decrease.
Meanwhile, Prof Dr Budy Resosudarmo from Ausralian National University (ANU) said, carbon tax is an effective mechanism to reduce carbon emission and air pollution while generating some revenue that can aid the very poor, especially in Malaysia and Indonesia. And he proposed the tax be levied at a rate of US$10 per tonne of carbon emission, using a computer-generated economic scenario known as GEMS. (Kamaruddin, 2014)
In a nutshell, the negative externalities may cause the negative impacts towards to the third parties indirectly. Some of the consumption occurred due to the high demand and supply which referred to the negative externalities which involved the maximum production and lead to the pollution. In overcome the pollution, the government has come out with the Pollution tax and several taxes that cover the pollution that been made by the firms. The action that taken by the government is an effective effort that need to be made in preserving the environments.
The most important part is, the government intervention is a basic method in taking a corrective action. By using a corrective tax and subsidy it does help the government in overcoming the issues that arise within the Malaysia. Without the interference from the government, the firms can do whatever they want to do without a proper guidelines and regulations. Besides the action that taken by the government, the society and the private sectors must take their own initiatives such as aware with the pollution issues and make a good collaboration in preserving the environment. The last but not least, as the knowledge was gained by the peoples, the most valuable part is to give back to the community.