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Externality Econoics Essay

1671 words - 7 pages

Negative Externality…
Negative Externality…

Whenever there are side effects caused by the private action that can have an impact on other people in crucial ways, we have the problem known as, externalities. The problem arises when it’s a negative consumption and/ or production externalities because there is no such market for them e.g.; noise, air or contamination. Due to the competitive markets it can become inefficient when the externalities occur, therefore government play’s a crucial role by making policies in an attempt to correct, the externalities.

Externalities are a cost or the benefits arising from the economic transactions that can have an impact on the third party, ...view middle of the document...

However, there are social costs associated with it like (air pollution) in the production of oil, which is ignored by the oil refinery. In the presence of negative externality social cost curve have to be higher than marginal cost curve. The original production value of the oil refinery company will indicate that their social benefits are higher than their social benefits and therefore the quantity are inefficient and that leads to market failure. Market failure occurs when market participants don’t account factors within the full social costs of their harmful economic activities. Moreover there are some opinions between social cost and marginal costs about out these which one of is related to the negative externality. If you look at the graphs you will probably note there is no such externality on the consumption side of the graph, thus meaning that marginal benefits=social benefits depict that demand curve will stay the same. As we know that when externality exists, economic efficiency will always exist whenever social benefits is equal to social costs. If this is the case, economic efficiency will occur at Point B. The area that is shaded in which social cost exceeds the social benefits costs is simple caused by the overproduction, another words it’s deadweight loss which is the fall in the total surplus that is resulted from a market distortion, like taxes or tariff. Society is better off if the economy were to be at point B rather than point A. Notice that at point B, the effective solution isn’t to decrease the harmful activity to 0. If the firm have capabilities to compensate the parties affected it completely and still have profit remains, then the pollution is worth it to the society. Although it’s very unlikely for an oil refinery to stop polluting the atmosphere depict that even if the quantity produced were to be below Q2, the benefits got from society were to be greater than the social costs, It can assumed that society is better off if the firms produces more polluting products.

Than on the other hand we have negative consumption externality which occurs due to the consumptions of a certain goods or services. The example of that would be, smoking. By smoking in public area, the consumer is doing passive smoking, which than leads to negative externalities. There are health cost that are associated with smoking like the smokers health cost is shared by the society, than there is a cost of family support (assuming in the case of early death), finally there is a risk to non-smokers. So you see consumption externality occurs when individual’s consumption of good imposes costs on others that aren’t transmitted through the market and in the case of smoking the smokers causes non-smokers to pay for their medical support through taxes thus imposing cost on others.

In negative consumption externality, the MPB and MSB are parallel to each other, but however MSB lies below the MPB. The vertical gap between MPB and MSB is where...

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