Effects of Vulgar Graffiti on South Street: An Analysis of Externality in Economics

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Introduction
“Market”, in economics, refers to a forum of interaction between the demand and the
supply side forces for different goods and services, where, the mutual interaction and
agreements between them (the buyers and the sellers) lead to decisions regarding the
quantities of commodities or services to be produced and the price levels for the same (Frank
& Cartwright, 2013).
However, often in the free market situation, the allocations of goods and services are
not efficient and the benefits are either accrued more by the buyers or the sellers. This, in
terms of economics, is known as market failure. There are various types of market failures,
which occur in real world scenario, of which one of the most common form is that of
externalities (Iossa & Martimort, 2015).
Keeping this into consideration, the concerned essay tries to analyse the effects of
vulgar graffiti which are sprayed on the roads and the footpaths of the South Street, with the
help of the conceptual framework of externality in economics. The essay also tries to discuss
the possible solution and policies which can be implemented by the government of the
concerned region, in order to mitigate the problem of externality arising out of the said
phenomenon.
Externality: Theoretical Framework
The term “externality”, in economics, refers to the impacts or effects which the
production or consumption of certain commodities or services, have on third parties, who are
not directly related to or involved in the production or the consumption of the same (Hall &
Lieberman, 2012). When the production or consumption activities for certain commodities or
services, benefits or increases the welfare of a third party who is not associated directly with
the transaction, then the same is said to be positive externality (Barr, 2012).

2ECONOMICS ASSIGNMENT
In case of positive externality in production, the social marginal cost of production is
lower than the private marginal cost of one additional unit of production of the commodity,
which can be seen as follows:
Figure 1: Positive externality in production
(Source: As created by the Author)
Thus, it can be seen that in case of positive externality in production, the socially
optimal level of output is higher than the level of output produced in the free market
situation. The converse happens in case of negative externality in production, where the
marginal cost borne by the society for one additional unit of production of a commodity is
higher than the private marginal cost. In this case, the socially efficient amount of production
is less than the free market level (Pigou, 2017).