Economic Analysis for Business

Running Head: ECONOMIC ANALYSIS FOR BUSINESS
Economic Analysis for Business
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1ECONOMIC ANALYSIS FOR BUSINESS
Table of Contents
Introduction................................................................................................................................2
Externalities related to not wearing helmet................................................................................2
Government intervention to correct the externality...................................................................4
Conclusion..................................................................................................................................6
References..................................................................................................................................7

2ECONOMIC ANALYSIS FOR BUSINESS
Introduction
Externality is the benefits or costs imposed on the third party not directly or indirectly
involved in consumption or production activity. The paper evaluates the external cost
imposed on the society when a rider does not wear helmet. It takes into consideration the
immediate cost after getting injured from an accident as well as the indirect cost that society
has to bear because of this activity (Baumol & Blinder, 2015). As a result of negative
externality, number of accident and hence, injury per accidents are more than optimal level.
A counteractive policy in response to this externality is to impose a tax or fines on person for
not wearing helmet. The paper examines the efficiency of such policy with some real world
example of countries those already have made compulsory to wear helmet while riding.
Externalities related to not wearing helmet
A helmet is supposed to protect the rider from sustaining severe injury in head in case
accidents happened. A rider should wear a helmet in times of riding bicycle. Researches
reveals that wearing helmet reduces the possibility of severe head injuries up to 74 percent
during accidents with moto vehicles (Levmore, 2014). A person by not wearing helmet not
only harm himself but also imposes additional cost on the society. In this context the issue of
negative externality needs to be discussed.
Negative externality is defined as an additional cost is incurred from an economic
transaction and is suffered by a third party (Hubbard, Garnett & Lewis, 2012). When a
bicycle rider without wearing helmet met with an accident, then first the person is picked off
to the spot of accidents and is then taken to hospital. Because of bare head, the person is
likely to get deeper injury then that would occur with helmet. Consequently, there is a higher
expense for this person than that would occur with helmet. The sustained injury might
prevent the person to join his regular profession and hence need unemployment benefits