Negative Externality

11 Key excerpts on "Negative Externality"

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  Fundamentals of Environmental Economics

  • Kumar, A(Authors)
  • 2021(Publication Date)
  • Daya Publishing House

    (Publisher)

  Chapter 3 Externalities Meaning, Sources and Types Externalities arise when certain actions of producers or consumers have unintended external (indirect) effects on other producers or/and consumers. Externalities may be positive or negative. Positive externality arises when an action by an individual or a group confers benefits to others. A technological spillover is a positive externality and it occurs when a firm’s invention not only benefits the firm but also enters into the society’s pool of technological knowledge and benefits the society as a whole. Negative externalities arise when an action by an individual or group produces harmful effects on others. Pollution is a Negative Externality. When a factory discharges its untreated effluents in a river, the river is polluted and consumers of the river water bear costs in the form of health costs or/and water purification costs. In an activity generating positive externality, social benefit is higher than private benefit and in an activity generating Negative Externality, social cost is higher than private cost. Thus, in the presence of externalities, social benefits (costs) and private benefits (costs) differ. The divergence between private benefits (costs) and social benefits (costs) results in inefficiency in resource allocation. Producers of externalities do not have any incentive to take into account the effects of their actions on others. In a competitive market economy, private optimum output is determined at the point where marginal private cost equals price. When a positive externality occurs, the marginal social benefit will be higher than the marginal private benefit (price) and hence the private optimal output will be lower than the social optimal output. When a Negative Externality occurs the marginal social cost will be higher than the marginal private cost (price) and This ebook is exclusively for this university only. Cannot be resold/distributed.

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  A Course in Public Economics

  • John Leach(Author)
  • 2003(Publication Date)
  • Cambridge University Press

    (Publisher)

  Externalities An externality is a situation in which the behaviour of a person or firm affects the welfare of another person, or the profitability of another firm, without appropriate monetary compensation occurring. 1 An externality is positive if some agent’s behaviour makes another agent better off, and it is negative if that behaviour makes another agent worse off. Once you start looking, externalities are everywhere: • Smokers like their nicotine “hit” but nearby non-smokers would prefer that they didn’t get it. • Someone playing music on a beach is emitting an externality – positive if you like the music and negative if you don’t. • Industrial emissions lower air and water quality, damaging our health and that of other species, and imposing additional costs on other firms who need clean air and water as part of their production processes. • You would be happier if your neighbours were avid gardeners than you would be if they put their old clunkers up on blocks on their front lawns. • You are better off if you are literate, but so are all the other people who have to deal with you, because they can communicate with you in writing. • Inoculation protects you against communicable diseases. However, many diseases require a large, dense population of susceptible people before they can establish themselves. Since each inoculation reduces the population of susceptible people, it also protects (to some degree) people who choose not to be inoculated. • Trails opened to mountain bikers typically widen and turn to mud, and tree falls become more numerous because of damage to their root systems. The mountain biker is just looking for a thrilling ride, but leaves behind imperceptible damage which is devastating in its cumulative impact. • Each car entering the freeway system at rush hour slows the others down (again, almost imperceptibly) with the result that the same trip can take several times longer during rush hour than it would during slack times.

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  Principles of Microeconomics for AP® Courses

  • Steven A. Greenlaw, Timothy Taylor(Authors)
  • 2015(Publication Date)
  • Openstax

    (Publisher)

  Those estimates may change, however, if the price of gasoline continues to rise. 278 Chapter 12 | Environmental Protection and Negative Externalities This OpenStax book is available for free at http://cnx.org/content/col11858/1.4 additional external cost biodiversity command-and-control regulation externality international externalities market failure marketable permit program Negative Externality pollution charge positive externality property rights social costs spillover KEY TERMS additional costs incurred by third parties outside the production process when a unit of output is produced the full spectrum of animal and plant genetic material laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover” externalities that cross national borders and that cannot be resolved by a single nation acting alone When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms a situation where a third party, outside the transaction, suffers from a market transaction by others a tax imposed on the quantity of pollution that a firm emits; also called a pollution tax a situation where a third party, outside the transaction, benefits from a market transaction by others the legal rights of ownership on which others are not allowed to infringe without paying compensation costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process, like costs of pollution see externality KEY CONCEPTS AND SUMMARY 12.1 The Economics of Pollution Economic production can cause environmental damage.

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  Price Theory and Applications

  • Steven Landsburg(Author)
  • 2013(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  C H A P T E R 13 External Costs and Benefits I n previous chapters, we have analyzed the gains from trade that accrue to voluntary participants in transactions. However, many transactions involve involuntary participants as well. The neighbors who breathe the smoke from a polluting factory, the naturalist who deplores the “ harvesting ” of whales, the shoppers who enjoy the spectacle of department store Christmas displays — all are incurring costs or benefits from transactions in which they had no part. Such costs and benefits are said to be external and are collectively referred to as externalities . External costs (like the annoyance of breathing factory smoke) are called negative externalities , and external benefits (like the pleasure from seeing Christmas decorations) are called positive externalities . In this chapter, we will see how externalities can be a source of economic inefficiency. We also will discuss what can be done about that problem. 13.1 The Problem of Pollution Pollution is an important example of a Negative Externality. Cars, for example, cause pollution — both when they are being manufactured and when they are being driven. We will use this example to illustrate all of the key ideas concerning externalities. Private Costs, Social Costs, and Externalities When car companies decide how many cars to produce, they consider such costs as labor, raw materials, and factory space. They typically do not, however, fully consider the costs their cars will impose on bystanders who are forced to breathe exhaust fumes. So when we talk about the cost of building a car, we need to distinguish between the private cost — the sum of all those costs the manufacturer accounts for — and the social cost — the sum of all costs, including both private costs and external costs. Exhibit 13.1 shows the private and marginal costs of automobile production.

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  Welfare Economics

  Towards a More Complete Analysis

  • Y. Ng(Author)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  7 Externality It was noted in Chapter 2 that an equilibrium situation of a perfectly competitive market economy is Pareto optimal under certain conditions. One of these conditions is the absence of (unaccounted for) external effects. However external effects are pervasive. External effects in the form of envir- onmental disruption have attracted both academic and public attention for decades (see for example Papandreou, 1994; Stavins, 2000). This chapter considers how external effects can cause non-optimality, and how this can be alleviated. But first we shall discuss the concept and classification of external effects. 7.1 The concept and classification of externalities Obviously, for an external effect to be present there must first be an effect. Some party, K (the affecting party) must produce an effect on some other party, J (the affected party). The effect must not just be present but must also have a positive or negative welfare significance. For example if water from my neighbour’s garden hose flows into my garden, a physical effect is there. But if I do not care about it one way or the other, it cannot be said that an externality exists. Second, the affecting party is usually a person, a group of persons or something that is under the control of persons (animals, institu- tions and so on). It is possible to speak of the external effects of, say, wild animals and use this to justify certain measures against them. But the usual methods of tax/subsidy, bargaining and so on will not be applicable. The affected party is also usually a person/group of persons or something owned by persons. However if the welfare of non-human beings, such as animals, enters into our objective function, then it is quite logical to include them as possibly affected parties. The mere presence of a welfare-relevant effect by one party on another does not necessarily constitute an externality; additional conditions are needed for the effect to be considered external.

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  How to Regulate

  A Guide for Policymakers

  • Thomas A. Lambert(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  You don’t make another patio sale for the rest of the day. You, my friend, have been the victim and the beneficiary of “externalities.” An externality occurs when some of the cost or benefit of an activity is experi- enced by someone “external” to the activity. The annoyance and business losses you suffered because of Brookside’s raucous pool party were negative 22 externalities – cost spillovers. So was your rent increase occasioned by the opening of the Google facility (though, as we’ll see, that was a special type of Negative Externality that is less troubling). The extra business you enjoyed because of your neighbor’s new planters constituted a positive externality, a benefit spillover. Your neighbor bore the full cost of providing those planters, but could not capture all the benefit – some trickled your way. symptoms/disease With most of the market failures we will consider, the adverse effects (the symptoms) and the cause of those effects (the disease) are distinct concepts. For example, with information asymmetry, the subject of Chapter 8, the primary symptom – an absence of high-quality products or services of a certain sort – is quite different than the disease – the fact that the sellers of those products and services have far more information about quality than do potential buyers. We usually have to connect a few dots to see exactly how a market failure occasions the adverse effects that result. With an externality, though, one symptom is closely related to the disease. When the externality is negative, there is an apparent injustice to the party bearing the spilled-over cost. It simply wasn’t fair, for example, for Brookside to disrupt your business with its loud pool party. When the externality is positive, the injustice is suffered by the party that created the benefit but couldn’t fully capture it. It wasn’t fair to your cafe ´ neighbor, for instance, that you should benefit from its planters even though you didn’t contribute to their creation.

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  An Economic History of the United States

  Connecting the Present with the Past

  • Mark V. Siegler(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  Indeed, pollution and other negative externalities often arise because there are no enforceable property rights to open-access goods such as the atmosphere or oceans. As a result, use of an open-access good continues unchecked until the marginal benefit of this use falls to zero. A “tragedy of the commons” problem occurs when individuals, each following his or her self-interest, behave in a way that is contrary to the whole group’s long-term interests by overusing a common-pool resource. The “commons” can include the Earth’s atmosphere, oceans, rivers, forests, or animals; they can also include the office refrigerator, or any other shared resource without private property rights. In the absence of legally defined and enforceable property rights, there is a tendency for overuse or overharvesting. Negative Exter nalities and Common Resources 393 OVERPRODUCTION AND DEADWEIGHT LOSS Consider an industry that is perfectly competitive in all ways except that the produc-tion of this industry’s good creates a Negative Externality on others in the economy, for example by emitting harmful pollution into the air or water. When firms in this indus-try make decisions about production, they usually only consider the marginal private costs they face and they may not internalize (i.e., take into account) the costs of pollu-tion on others. In this case, the true marginal social costs (which include not only the marginal private costs to firms but also the marginal costs of the externality on others) are higher than the marginal private costs. This is shown in Figure 19.1 , where the marginal social costs ( MSC ), which are the sums of the marginal private costs plus the marginal costs of the externality, are above the firms’ marginal private costs ( MPC ). The sums of all firms’ marginal private costs ( MPC ) are the market supply curve.

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  Classic Papers in Natural Resource Economics

  • C. Gopalakrishnan(Author)
  • 2000(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The legal position has also been modi- fied by statutory enactments. 53 Williams, op. cit. supra n. 49 at 242, 258. 54 Boulston v. Hardy, Cro. Eliz., 547, 548, 77 Eng. Rep. 216. 55 Williams, op. cit. supra n. 49 at 243. 56 58 Sol. J. 612 (1913–1914). 57 Williams, op. cit. supra n. 49 at 259. 58 Pigou, op. cit. supra n. 35 at 185. 59 Williams, op. cit. supra n. 49 at 244–47. 60 Pigou, op. cit. supra n. 35 at 192. 61 Id. 174–75. 62 Id. 177–83. 63 Id. 175–77. 64 Id. 192–4, 381 and Public Finance 94–100 (3d ed. 1947). The Problem of Social Cost 137 6 Externality James M. Buchanan and William C. Stubblebine Externality has been, and is, central to the neo-classical critique of market organisation. In its various forms – external economies and dis- economies, divergencies between marginal social and marginal private cost or product, spillover and neighbourhood effects, collective or public goods – externality dominates theoretical welfare economics, and, in one sense, the theory of economic policy generally. Despite this importance and emphasis, rigorous definitions of the concept itself are not readily available in the literature. As Scitovosky has noted, “defini- tions of external economies are few and unsatisfactory”. 1 The following seems typical: External effects exist in consumption whenever the shape or posi- tion of a man’s indifference curve depends on the consumption of other men. [External effects] are present whenever a firm’s production func- tion depends in some way on the amounts of the inputs or outputs of another firm. 2 It seems clear that operational and usable definitions are required. In this paper, we propose to clarify the notion of externality by defin- ing it rigorously and precisely. When this is done, several important, and often overlooked, conceptual distinctions follow more or less auto- matically.

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  Environmental and Natural Resources Economics

  Theory, Policy, and the Sustainable Society

  • Steven Hackett, Sahan T. M. Dissanayake(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)
• While the legal system is designed to protect property, open-access and public trust resources were not traditionally protected under common law from pollution harms and thus remain subject to degradation. The legal system does not function perfectly, of course, and so pollution harms to people, their homes, and other valuable objects that are property do regularly occur. One problem is in determining the source of the pollution when there may be very large numbers of emitters, as is the case with automobile exhaust.
• Negative externalities are uncompensated damage costs borne by members of society. These negative externalities are generated as a by-product of production and exchange. Profit-maximizing firms have an incentive to transform private costs into negative externalities (external costs) in the absence of regulation or reputation effects. When there are important negative externalities, market supply based on private costs to sellers is too large, leading to too much of the good or service generating the negative externalities being produced in otherwise well-functioning competitive markets. Pigouvian taxes represent a form of policy intervention that can enhance market efficiency.
• In the real world, it is difficult to craft Pigouvian taxes due to (a) practical problems measuring marginal external costs without controversy, and (b) the influence of rival interest groups and political expediency in the policymaking process.

Review Questions and Problems

1. Suppose that there are 100 identical competitive firms, each of which supplies a quantity where price equals marginal cost. Therefore, if marginal cost is 10 + Q, each individual firm’s supply curve is given by P = 10 + Q. As there are 100 such firms, the market supply curve is P = 10 + .01Q. Also assume that market demand is given by P = 100 ‒ .005Q. Note that Q refers to the quantity of some good, like shoes.
   1. Solve for the competitive market equilibrium price and quantity.
   2. Suppose now that in Review Problem 1a, firms were freely polluting by emitting marginal external costs equal to a constant $20 for each unit of output produced. Based on this information, we know that each firm’s social-cost supply curve is given by P = 30 + Q, and the social-cost market supply is given by the function P = 30 + .01Q