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Remedial Measures, Social Control Measures

 Remedial Measuress
  1. Social Control Measures – First Pigou, suggest social control measures to attain the “ideal output” or optimum welfare. National dividend would be the maximum according to Pigou, when the values of the social net product are equal in all possible uses. If the value of the social net product or product or resources is less in any one use than in any order, the national dividend can be achieved by social control. The state can ask the factory owner to move out of the residential area by providing appropriate facilities to the smoke emitting factory. It can interfere in all the cases of external diseconomies of production to remove the divergences between private and social costs and benefits.
  1. Taxes and Subsidies – Pigou suggest the use of taxes or subsidies to bridge the gap between private and social costs and benefits. The state can impose taxes in all cases of external diseconomies in production and consumption. For instance, the state can levy tax on every family and pay the sum so collected to the smoke factory to move away. In the case of external economies of production, the state can give subsidies to producers so that national dividend increases and the ideal output is attained. While tax concessions to consumers can help them in maximising their satisfactions by consuming more commodities.

Such cases are explained with the help of demand and supply curves. The demand supply curves of a free competitive market reflect only direct private benefits and costs and not externalities. If externalities exist, the free competitive market will not provide a socially optimum level. The government can internalise externalities by levying taxes and granting subsidies. Suppose social costs exceed private costs which mean that there are negative externalities. In this case, there is overproduction of the commodity by the industry than is needed by the society.

To reduce overproduction, Pigou has presented a diagram where tax imposed on commodity is explained. Let us discuss it.


D and S curves are the market demand and supply curves respectively. They intersect at point E and OQ output results. The curve S includes only direct costs incurred by producers of the commodity. It does not include negative externalities. When they are added or internalised in the market supply curve S, the supply curve S1 results. Now the S1 curve intersects D curve at point E1 and a smaller output OQ1 is obtained. This is the socially optimum level of output. A tax on the producers equal to T per unit of output will reduce the quantity of commodity produced from OQ to OQ1 which will also reduce the negative externality associated with OQ output.

            When social benefits exceed private benefits, there are positive externalities. In this case, there is under production of the commodity than is needed by the society. To correct this, Pigou suggested the grant of subsidy on per unit of commodity to the producer. This is represented in the above figure where D and S are the market demand and supply curves respectively. They intersect at point E and OQ output results.

But this is not a social optimum level of output. To encourage the production of the commodity which yields positive externalities, the government gives subsidy to the producer equivalent to B which causes the demand curve to shift upwards from D to D1. This increases the quantity of the commodity produced from OQ to OQ1 which is the socially optimum level. Thus taxes and subsidies are the most effective ways to coincide private costs and benefits with social costs and benefits.

  1. Public Goods – If the number of potential customers of a public good is very large, it can be supplied with the help of some public authority. However the benefits of public goods are indivisible. Hence the state should make people share the costs of public goods so that everyone is made better off.

Analysis of Externalities or Divergences Between Private and Social Costs and Returns Benefits

            Divergences between private and social costs and returns benefits are known as externalities, external effects or external economies and diseconomies. Another term is spillovers or neighbourhood effects.

An external effect is assumed to exist whenever the production by a firm or the utility of an individual depends on some activity of another firm or individual “through a means which is not bought and sold: such a means is not marketable at least at present.”

            In other words externalities may run from consumption to consumption and from consumption to production. There are positive and negative externalities. The beneficial externalities are called positive externalities. The costly externalities are called negative externalities. In other words, if social benefits exceed private benefits it is positive externality or external diseconomy.

            Externalities are in fact, market imperfections where the market offers no price for service or disservice. These externalities lead to misallocation of resources and cause production or consumption to fall short of an optimum level. Thus they do not lead to maximum social welfare.

            Pigou’s major contribution lies in studying the main causes leading to divergences between private and social costs and returns and in suggesting measures for removing these divergences.

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