The economics consequences of internalization of negative externalities

Voluntary exchange would only take place if both parties perceive at their better offer. Sometimes these exchange result in spillovers and it is called spillover externalities. Externalities are costs or benefits not transmited through prices to other parties than those involved in the transaction. The first party bears no costs for their impact on society, while the second party receives no benefits from being impact. This occurs when marginal social cost is greater than marginal private cost. (MSC > MPC)

To remind you ir short :

Talking about these negative externalities as an example we took a corn farmer too explain everything more clearly.

As you already understood this farmer is growing corns. What is the private cost that he face to help determine how many years for corn to grow? Things like fuel, seeds, fertilizer.. These are the private costs, but it turns out that every spring and summer where he lies down his fertilizer some of this flowns into the strain near by. And because of this often times enlarge fish kills. All those down strain, fishermen land owner and recreationist, incure a negative externality.

TAXATION – Pigouvian suggested that we could empose a tax on a producer that would reduce the amount of production of whatever the good is that is producing the negative externality. The benefit of this of course is that it would reduce the amount of negative externality being imposed down the strain. However the difficulty is monetary. It is difficult to know how much fertilizer being layed down or how much pollution has been emited in various point sources. And so the monetary costs are quite high.