Public solutions of externalities: An application of Turkey

Within this study, externalities as market failures and their public solutions willbe explored. The issue of externalities is important for establishing a relation betweenenvironment and economics. Therefore in theoretical part of the study, theory ofexternalities will be analyzed; firstly different definitions in the literature, secondlydifferent classifications of externalities and thirdly public and market solutions forinternalization of externalities will be discussed. After the analysis, it is concluded thatpublic solutions such as taxation, subsidies, charges, pollution rights and direct controlsare superior in comparison to the market solutions like the Coase theorem and Hicks-Kaldor criterion.In the application part of the study, economic effects of a tax on environmentpolluting fossil fuels (coal, oil and natural gas), which are used for producing energy inTurkey, will be analyzed. By using a linear programming model, which is also used as aproduction planning method, optimal production quantities, in a framework where thereis an environmental tax on fossil fuel consuming sectors, will be estimated. Theestimation indicates that coal sector must reduce its production due to bothenvironmental and economic reasons. In addition it is observed that natural gas sector isthe most sensitive sector to the environmental tax. Because of the fact that taxingconsumption of a commodity increases the consumption of its substitution commodity,it will be concluded that public solutions that encourage the use of renewable resourcesinstead of fossil fuels in the power production are inevitable.Key Words: Market Failures, Externalities, External Costs, Environmental Economics,Linear Programming