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1. Analyse with the aid of a diagram, why it may be necessary for government to intervene in
the case of pollution created by steel production. Using the same diagram, explain the policy
options at the disposal of government to address this issue.
Government Intervention in Steel Production Pollution
Introduction
Steel production is a classic example of a market failure that necessitates government intervention.
The production of steel generates significant negative externalities in the form of air and water
pollution, which impose costs on society that are not reflected in the market price of steel. This essay
analyses why government intervention is necessary in cases of pollution created by steel production
and explains the policy options available to address this issue, with reference to the theoretical
framework provided by Estian Calitz et al. (2023).
The Negative Production Externality in Steel Production
Understanding the Market Failure
Steel production typically involves processes such as coke-making, sintering, iron-making, and
steel-making, which release various pollutants including particulate matter, sulphur dioxide, nitrogen
oxides, carbon dioxide, and heavy metals. These emissions impose external costs on society through
negative health impacts, environmental degradation, and climate change effects.
Calitz et al. (2023: 49) explain that "External effects drive wedges between the private (or monetary)
costs and benefits and the social costs and benefits of everyday market transactions." In the case of
steel production, the marginal social cost (MSC) exceeds the marginal private cost (MPC) because
producers do not bear the full costs of pollution they generate.
Diagram: Negative Production Externality in the Steel Market
1. Analyse with the aid of a diagram, why it may be necessary for government to intervene in
the case of pollution created by steel production. Using the same diagram, explain the policy
options at the disposal of government to address this issue.
Government Intervention in Steel Production Pollution
Introduction
Steel production is a classic example of a market failure that necessitates government intervention.
The production of steel generates significant negative externalities in the form of air and water
pollution, which impose costs on society that are not reflected in the market price of steel. This essay
analyses why government intervention is necessary in cases of pollution created by steel production
and explains the policy options available to address this issue, with reference to the theoretical
framework provided by Estian Calitz et al. (2023).
The Negative Production Externality in Steel Production
Understanding the Market Failure
Steel production typically involves processes such as coke-making, sintering, iron-making, and
steel-making, which release various pollutants including particulate matter, sulphur dioxide, nitrogen
oxides, carbon dioxide, and heavy metals. These emissions impose external costs on society through
negative health impacts, environmental degradation, and climate change effects.
Calitz et al. (2023: 49) explain that "External effects drive wedges between the private (or monetary)
costs and benefits and the social costs and benefits of everyday market transactions." In the case of
steel production, the marginal social cost (MSC) exceeds the marginal private cost (MPC) because
producers do not bear the full costs of pollution they generate.
Diagram: Negative Production Externality in the Steel Market
