Positive Externality

Positive Externality is a benefit that is enjoyed by the third party as a result of an economic transaction. Third parties include any individual, organization, property owner, or resource that is indirectly affected.

A positive externality of production exists if the production of the good or service provide spill over benefits to a third party not directly involved in the market. For example International law saves the forest from deforestation which provides benefits to the society and wild life.

Positive Externality of Consumption

A positive externality of consumption exists if the consumption of the good or service produces spill over benefits to a third party not involved in the consumption. For example students getting the education at the opportunity of the education provide direct benefits to students with the increase salaries, good career, good travelling, plans etc. The spill over benefits of education of the students results in more taxes for the government which may enable other people to get education. Educated people are more productive for the society. They may provide more employment opportunities to the society.

Government Responses to Positive Externalities

When a market fails by under allocating resources towards the production of a good society stands benefits from increasing production and consumption of the good in market. This can improve the efficiency of the market. These measures may include the following:

  1. Corrective subsidies to producers.
  2. Corrective subsidies to consumers that are that government will subsidies education.
  3. Positive environment.
  4. Corrective subsidies to the producers that are that government will reduce the taxes etc.              

Negative Externality

A negative externality is a cost that is suffered by a third party as a result of an economic transaction. In transaction the producer and the consumer are the first and the second parties and the third parties include an individual, organization, property owner or resource that is indirectly offered.

Negative Externalities of Production

Most of the industrial production creates pollution. A polluting industry creates extra cost for the society. But those costs are not paid by the polluting firm. These extra costs include:

  1. Greenhouse gas omission which results in global warming.
  2. Contribution to lungs diseases and cancer rates
  3. Water pollution; which destroys ocean life or marine life.
  4. Soil contamination which destroys agriculture production.

All these externalities create social cost that is not paid by the private firms.

Government Responses to these Externalities

Whenever a market fails by allocating too many resources towards the production of the goods, the government can intervene to improve the efficiency of the market to reduce the quantity produced and consumed. The government maintains the following actions to reduce the inefficiency.

Collective Taxes:

The government may impose heavy taxes on those goods whose public cost is more than private cost for example cigarettes, cosmetics.

Corrective Action Ban:

Certain products create social problem, the government may ban because the social cost is more than the private cost for example polyethene bags, cold drinks and cigarettes.

Tradable Permits:

If the government wants some products to be in hands of particular consumer they should issue tradable permits.

How to Evaluate these Measures

  • These corrective measures should result into higher cost for producers.
  • These measures should produce higher cost for consumers.
  • These measures should reduce employment in those sectors.
  • The products of those industries should loose competitiveness in the global market.

The tradable permits reduce the negative externalities. By the tradable permits the government practically reduces the production of the certain goods. The government increases the price of the tradable permits.

business economics

December 06, 2018