Negative Externality and Its Impact on Economic Efficiency

Running head: NEGATIVE EXTERNALITY
Negative externality
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NEGATIVE EXTERNALITY
Answer 2
Economic efficiency can be stated as that state in the economy in those cases where
each and every resource will be optimally allocated for serving the individual in the best way.
In case of an efficient economy, when a change is made in the entity it will be changing the
other as well. Goods are generally produced at their lowest possible cost with variable inputs
of production. Therefore, economic efficiency can be defined as a state where all the resource
is generally allocated optimally such that each person is served the best possible way. In this
case waste and inefficiency are generally minimized. Some of the factors which affect the
economic efficiency are that production of the commodities should be at the lowest cost.
Another factor is that any one individual cannot gain by means of allocating the products
without making the other person worse off. Economic efficiency also indicates that there
need to be a presence of balance between the befit and loss. The key to attain the economic
efficiency is specialisation by the division of labour (Griffin, & Bromley, 2018). It is
important to attain economic efficiency as resource is limited, they will provide maximum
utility when they are put to best use. Therefore, the objective of every economy is to achieve
efficiency such that maximum amount of benefit is achieved to everyone. Wealth creation
can also be maximised by optimum efficiency of the resources. Therefore it can be said that a
nation can become richer by better efficiency of utilisation of resources. Full production takes
place when there is a presence of two kinds of efficiencies, one is the productive efficiency
and the other is allocative efficiency. Allocative efficiency takes place when resources are
used for producing the combination of the services and goods which is most wanted by the
society (Jacobs & De Mooij, 2015). On the other hand productive efficiency means the cheap
production techniques are used to produce the wanted services and goods

MSC
MPC
D=MB
DWL
Q1Q
P
Quantity
Cost &
benefit
A
B
C
NEGATIVE EXTERNALITY
Figure 1 negative externality
Air pollution can be defined as the mixture of solid particles and gases in the air
which is harmful for the al living creatures. Air pollution can be termed as negative
externality which affects the economic efficiency of the market equilibrium. A negative
externality takes place when any firm makes a decision of not paying the full cost of the
decision. When the good is negative externality the cost of the society will be greater than the
cost which the consumer is paying for it. As consumers make most of the decisions then the
marginal cost will be equal to the marginal benefit and the cost of negative externality will
not be taking in to account. It will generally lead to negative externality in the market when
roper actions are not taken (Jacobs & De Mooij, 2015). When the negative externalities takes
place in the market which is not regulated and the producers will not be taking
responsibilities for the external cost and will be then passed on to the other societies.
Therefore, it can be said that producers will be having low marginal costs than they would
have and then the supply curve will be getting shifted down which the society usually faces.