Login with Facebook

Economic Externalities and How to Deal with Them

In economics, one of the main areas of study is environmental economics. Economic scholars and experts have established that there is a direct link between economic development and the environment. It is believed that economic development has a negative impact on the natural ecology, leading to the loss of ecological systems.

We live in a world when human needs are unlimited, and the natural resources expected to feed these needs are limited. The economy requires the availability of the resources used as raw materials in creating the required products. And these materials come from the environment. This is where the issues of scarcity come. There are never enough resources to go around, and the little left is supposed to protect the environment.

Environmental economics deals with the impacts of economic activities on the environment. It has been established that the best way to protect the environment truly would be to cease economic development, which is not possible. Therefore, we can only do this by creating policies and regulations against the excessive use of natural resources.

Another aspect of environmental economics is failed markets. This is when markets fail to effectively allocate the limited resources available for creating economic progress and profits. In market failure, we find externality as a subject of study under the economics of the environment.

In this discussion, we are going to define externalities, types, causes, and solutions. Students taking economics at higher levels of education must undertake this course because it helps then understand the best way to protect our natural resources while ensuring proper economic growth at the same time. It is the responsibility of every human being to protect the environment because negative externalities like pollution and hazards negatively impact the environment.

What Is an Externality?

Human beings are defined in economics as social beings and rational decision-makers. This means we are faced with decisions on a daily basis, which we have not a choice but to make. Every choice has consequences, mostly effective other people around us positively and negatively. The relationship between producers and consumers in a market setting creates a perfect economic environment. In this case, firms and households are often faced with decisions they must make, which has an impact on the economies. When an individual or a firm takes a choice that affects another person without any sense of accountability, an externality will exist.

We can define externality as a cost or benefit of an economic activity experienced by a third party not directly related to the activity being undertaken. The external cost or profit does not appear in the final cost or benefit of the good or service. For this reason, economists consider externalities a serious issue that can cause serious problems on markets by causing inefficiency, leading to failures of these markets. They are also viewed as the main fuel behind the Tragedy on the commons. An externality is a cost or benefit that impacts a third party who did not agree to take part in the activity that caused the effect.

An externality exists when the product or consumption of a good or service's private price equilibrium does not represent the true cost of the said product's benefits for the whole society. This means the firm's economic activity failed to allocate limited resources in a manner that is seen fit to society. The result of this case is the competitive externality equilibrium not to be Pareto optimality.

In most cases, externalities are seen as negative effects, although they can also be positive. Governments and institutions take actions of internalizing externalities, and hence, market-priced transactions can take into account all the benefits and cost linked with the transaction between economic agents. This happens mostly when tax is not imposed, and so when the externality reaches a certain level, it attracts a very high tax. Poorly designed taxation laws can be the main cause of externalities on commons. Since regulators don't always have all the information on the externality, it becomes hard to impose the right tax. A competitive equilibrium becomes a Pareto optimal at the point where an externality is internalized through tax imposition. 

Consider, for instance, manufacturing firm activity that causes air pollution. Such activities concerned parties can come up with health and clean-up costs for the whole society. On the other hand, the neighbors of households who choose to use fireproofing technology on their homes may enjoy the benefits of reduced fire risks spreading to their homes. Where external costs pollution exists, the causing party may choose to produce more of the product than would be required in the case where they would be required to pay all associated environmental costs. Note that the responsibility of a consequence lies partly outside the self, and hence, an element of externality is existent. Where there are benefits of external benefits, like public safety, the maker many produce fewer goods than that they would if they were to receive compensation for the external benefits to others. In other words, an externality may either benefit the doer at the cost of society or benefit society at the doer's cost. To understand these statements, we say that the overall cost and benefit to society is the sum of the monetary value of the benefits imposed and the cost of all parties involved.

Externalities is not a new concept as it began with British economists who have credited with the initiation of the study of externalities in the formal institutions. It was referred to as the "spillover effects." Henry Sidgwick (1838-1900) discussed the first person to articulate the issues while Arthur C Pigou (1877 – 1959) formalized the concept. Today, the word externality is applied because the effects produced on others, whether positive or negative, it external to the market.

A negative externality is any difference existing between the private cost of the activity or decision and its cost to society. This means a negative externality is anything that may cause an indirect cost to the individual. For instance, industries realized toxic gases into the environment, which may harm people living within their reach, and hence, they are burdened to a cost (indirect) of getting rid of the harm. If the air is badly polluted from firm fumes or water is contaminated from mines, it may cause sicknesses to the factory's societies. These individuals are faced with a decision to either continue living in silence as they suffer or stop the pollution. Either way, there is still a cost they have to incur. On the other hand, a positive externality exists are a difference between the private gain of the decision to the economic agents and its benefit to society. Simply put, a positive externality is that effects positively indirectly. For instance, if an individual plants trees, they will make their property look beautiful, and it will also be cleaning the air in the areas around, which is beneficial to a society indirectly.

Sometimes there exists voluntary exchange, which is mutually beneficial to both parties because they would not agree to take any decision if it were not to best of their interest. But then, these are two parties who understand what is happening, and they have an agreement. However, this transaction can stretch its effects into the line of a third party who may not have any knowledge or consent to it. Looking at it from this perfective, the effects may come as bad – pollution from factory operation nearby, or as good – honey bees kept by a firm for honey can pollinate neighboring crops.

According to neoclassical economists, where plausible conditions exist, externalities will appear as a result of the outcomes that are not optimal to societal expectations. Sufferers from external negative effects bear the cost involuntarily, while those who reap the benefits do so at no extra cost. If there are external costs to voluntary exchange, it may lead to a reduction in social welfare. An individual suffering from negative impacts of an externality due to air pollution looks at it as a lowered utility. It is either subject to displeasure or the high costs they will be forced to incur, such as high medical bills.

An externality can even be considered a trespass on these individuals' lungs, which is in violation of their property rights. Since the Pareto efficiency underpins the justification for private property, negative externalities are inefficient to it. They do not conform to the whole idea of market economies, and this why they are seen to cause more problems than positive ones.

Negative Externalities

Any economic activity that imposes a negative effect on an unrelated third party is called a negative externality or external cost. It can come from the production or consumption of the product. For instance, pollution is seen as an externality because it imposes costs on people who are not related (external) to the producers. They don't have any mutual agreement that this production will beneficial to both or either of the parties. Many of these negative externalities are related to the consequences of production and use on the environment. When a firm carries out production activities without considering environmental concerns, they are imposing such costs to a society that may not have had anything with the production process or any agreements to this effect.

Types of negative externalities include:

Air pollution

Air pollution is the most common form of externalities. It arises from a wide range of sources, especially from burning fossil fuels. This action can damage crops, materials, and historic buildings, apart from public health.

Anthropogenic climate change

One of the biggest issues being looked at in terms of sustainable development under global goals is global warming. This is a result of greenhouse gas emissions from the burning of fossil fuel. These gasses affect the ozone layer, which shields hash UV lights from hitting the earth. Economists of climate change have often raised concerns that these changes present a huge challenge to the environment, as it is the best example of a market failure.

Water pollution

When industries release their waste into rivers, it becomes harmful to plants, animals, and humans. Using water from growing plants can have a negative effect on citizens of states who are affected by deceased water.

Noise pollution

Noise pollution occurs during production, which may lead to loss of hearing. It can also be mentally and psychologically disruptive.  

Other types of negative externalities

Negative externalities are visible in a wide range of human activities. Spam during the sending of unsolicited messages by email cause the same risk. There is also a systemic risk to the general economy emerging from the risks that banking systems take. A moral hazard can occur in the absence of well-designed banking regulation or a poor system.

The negative effect of industrial farm animal production, which includes the surge in antibiotic-resistant bacteria due to too much use of antibiotics, is similar. This also includes air quality issues, the contamination of rivers, streams, and coastal waters dues to concentrated animal waste.

Overfishing leads to the depletion of fish stock in the ocean and instance of common property resources. This leads to the Tragedy of the commons, where appropriate environmental concern does not exist.

The cost of storing nuclear waste from nuclear plants for over 1000 years in the USA has been included in the cost of electricity produced by the plant in the form of a fee paid to the government and stored in nuclear waste superfund.

Passive smoking, second-hand smoke, and overuse of antibiotics are listed as negative consumption externalities. They all lead to a negative result, which should lead to negative economic growth.

Positive externalities

Examples of positive externalities include been keepers who keep their bees for honey, which could also help in pollination. Consider also when an industrial company offers free first aid classes of employees to improve their job safety. Restored historic sites, and a foreign firm demonstrating up-to-date technologies to a local firm as a way to improve productivity, are all under positive externalities.

Conclusion and solution

Both negative and positive externalities have adverse effects on market efficiency. Therefore, policymakers and economists come up with different solutions to these issues. It is generally done through government intervention by properly defining property rights, imposing heavy taxes on goods that cause externalitiesEconomic Externalities, and providing subsidies to stimulate specific actions. 

Author: James Hamilton


Comments

Need a custom
essay?

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Corporate Behavior
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Deontology Vs. Utilitarianism
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Economy and Air Pollution
Economic Externalities and How to Deal with Them
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Fiscal and Monetary Policies in Response to 2008/2009
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How women can manage sexual harassment
How to conduct economic research?
How to define the Enterprise Value
How cancer is developed - Cancer biology
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Investment in Human Capital
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Microeconomic Analysis to the Demand for Labor
Modern journalism
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Parkinson's disease
Perspectives on Television: Analysis
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Risk and the value of information
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
Segregation in the US.
The Role of Internal Audit in Corporate Risk Management
The Use of Law on Economics and Vice Versa
The political theory of Thomas Hobbes
The Game Theory in Social Media
Unions
Unemployment
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What is Transcranial magnetic stimulation (TMS)?
What are the different genres of films?
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?