• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Essay on negative externalities

Extracts from this document...


Explain the concept of negative externalities: A spillover effect associated with production or consumption that extends to a third party outside the market. In other words, an external effect that generates costs or benefits to the third party is known as an externality There are two types of negative externalities 1)Negative externalities of production These externalities occur when production of goods and services creates external costs that are damaging to third parties. For example, Consider the example of a firm producing negative externalities. A chemical factory discharges its waste products into a local river. This kills off the fish stock and causes illness amongst water sports' enthusiasts who use the river for recreational purposes. Here in this case , there is a cost to the community greater than the costs of production paid by the firm. The firm is creating external costs in this case. Thus , the marginal social cost of production is greater than the marginal private cost. ...read more.


They do not care aout the negative externalities that they are creating. They will continue to buy Q1 cars at a price of P1. The socially acceptable output should be Q2. Thus , the consumers are consuming Q1 to Q2 extra cars. Since marginal social cost is greater than marginal social benefit , it causes a welfare loss to the society and thus , has negative externalities. In a free market , this situation will continue because consumers and producers are bothered only about their own private costs. The government needs to take measures to reduce these external costs of production . Part 2 Evaluate three policies that may be used by government to reduce external costs of production. Negative externality of production occurs when a firm creates external costs that are damaging to third parties. Above is a representation of a car factory having negative externalities of production .We can clearly see from the diagram that the marginal private costs for the car factory are lesser than the marginal social costs. ...read more.


To meet the standards, the firm would have to spend money, thus increasing their private costs and forcing them to restrict output. A problem with this solution is that the ban or restriction could lead to job losses and non consumption of the product which might be valuable . Also ,the setting and implementation of the policy standards may be long and debatable and might involve hidden costs. 3) The government could issue tradable emission permits. These are a market based solution to negative externalities of production. These licenses are created by the government and give the firm license to create pollution up to a certain level. Once they are issued , firms can buy , sell and trade the permits on the market. The government decides on the level of pollution it will permit each year and then split the total level of pollution into aq number of permits which will be given to different firms. The result is that if the firm pollutes higher than the quota, then it will have to buy permits from other firms which will raise its costs of production and thus force it to reduce production or to invest in Sustainable Development. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Peer reviewed

    Economics Article Commentary. London gets EU reprieve over air pollution. The air pollution is ...

    3 star(s)

    Thus the MPB curve would shift to left, towards the MSB curve. This is shown in the diagram above. However, the cost of this may be too high, although if taxes are in place, then the revenue could be used to fund these measures.

  2. Extended Essay

    Before the political and economic viewpoint change the whole energy sector was state owned. The price of the natural gas was constantly under the world market price. Every single person, from the poor to the rich equally were subsidised and they paid much less than the world market price.

  1. Alabama's Cigarette Tax Article. The basic economic problem in this article is negative externalities. ...

    to provide financing for the general fund, which benefits the entire population of the State," he told the newspaper. "It's a fairness issue of taxation." Sutton also said raising taxes on cigarettes will encourage smokers Alabama to cross state lines to buy cigarettes; it hurts sales in stores and other retail outlets in Alabama.

  2. Negative Externalities

    Also, external costs + marginal private costs=marginal social cost. In this diagram, we see the marginal private costs are below the marginal social costs, because of externals costs that are created. The firm will be concerned with the private costs, so it will produce at Q1.

  1. LDC Essay Economics Aid

    Companies who under-use their permits can sell them. This effectively taxes poorly performing companies and subsidises companies using best practice. Conservation and the protection of biodiversity is one such issue. If species or ecosystems are destroyed, the world may lose resources that have not been yet discovered.

  2. Negative Externalities Essay

    Without government intervention, the good and/or service will be under-priced and thus the negative externalities will not be taken into consideration. In a free market, the government must sometimes intervene to stop marginal social costs (MSCs) becoming greater than marginal social benefits (MSBs).

  1. Has the Time Come to Legalize Drugs?

    the illegal state of these drugs aids the dealers, harming the government. Figure 2 Price elasticity of demand of a good is a measure of the extent to which the quantity demanded of a good changes when its price changes.

  2. This essay will evaluate the concept of what negative externalities are and how they ...

    Since the factory is only concerned about private costs it produces at P1Q1 and not at the ideal equilibrium which is at PeQe. At QePe the marginal social costs are equal to the marginal social benefit causing a market failure.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work