Externality Econoics

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Submitted By Ashan
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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, and they aren’t taken into account by those whom undertake that particular transaction. In market economy externalities generally occurs where ever there is a direct effect of the actions of one person or the firm on the welfare of another person or firm in a way that isn’t transmitted accurately through a market system.

There two forms of externalities positive and negative, and negative production externality happens whenever the production of a good develops a cost borne by the person outside the production of that good. Simple example of that could be, air pollution that occurs through the production of oil by the oil refinery, the air around the suburb will get polluted and makes the community living close to oil refinery worse off, by diminished health or effect the ability of seeing a clear blue sky and stars at night, etc…

The graphs below shows us that the firms only going to take into account only their own marginal cost that increases the firm’s cost when it produces one or more unit of a goods and hence it will produce where marginal benefits is equals to marginal costs. It indicates that supply equal demands. Referring back to our example of oil refinery it…...

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