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Understanding Negative Externalities

   

Added on  2020-02-24

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Running head: NEGATIVE EXTERNALITIESNegative externalities NameInstitution Affiliation
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NEGATIVE EXTERNALITIES2 A negative externality or social cost occurs when the third party ends up paying the price as a result of an economic transaction they were not part of, where the first and second parties are the producer and consumer respectively, and the third part is any other individual, resource, company or company owner who is indirectly affected. Negative externalities are usually created in circumstances where there has been no allocation of property rights over resources or assets, or there has been some uncertainties (Economics Online, n.d.). A good example of this would be since no one owns oceans and it cannot say to be anyone’s private property, companies feel like they can pollute water without any persecutions which emphasize the importance of property rights for the development of economies. Social costs may when companies have failed to include them when they are doing calculations concerning the costs of production. This mistake is usually made because social costs cannot be measured using financial data on which production decisions are centered. An example of this would be when a company decides to expand in a new location and doing the calculations the cost that people wholive in that area will accrue due to the noise or smoke level, for instance, was not accounted for which would produce economic results that do not benefit the society because the people living in that area were not included when the company was making the decision to expand to that area.So the only people who will be benefiting are the owners of the company who won’t be affected by the increased noise or smoke level. Although companies could solve negative externalities by internalizing the costs third parties have to pay, many of them could afford it; so the next best option is for governments to step up and resolve the issues. Negative externalities create a market failure and impact the economic efficiency, so governments have to intervene to address that inefficiency. In an optimally efficient market, there is a perfect allocation of resources to whom need them in
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NEGATIVE EXTERNALITIES3appropriate amounts. In an efficient economy, the society uses resources to produce a satisfying amount of goods and services that are is superior to other societies using fewer resources. In efficient markets, however, there is no allocation so it creates a disorder where some may take way too many resources for themselves while others are left with scraps. By intervening the government fight against these inequalities by various means such as regulations, subsidies, and taxation.
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