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

This essay will evaluate the concept of what negative externalities are and how they play a role in the economy.

Extracts from this document...


´╗┐Eduardo Salazar Economics Negative Externalities of Production 1 a. This essay will evaluate the concept of what negative externalities are and how they play a role in the economy. Negative externalities occur when the production of a good or service creates external costs that are damaging to third parties. Third parties in this case, are a population of people or a society who play no role in the part of consumption or production of a product but are still affected (negatively) in some manner. In most cases of negative externalities of production, the third parties are affected negatively by environmental problems that are a caused by the production of many goods and services. An example is a paint factory emitting dangerous fumes to the community surrounding the factory. In this case the costs of the community are greater than the cost of the paint production. The firm has it?s own private costs such as wages, insurance, electricity, and more and on top of that is now creating external costs such as smoke, fumes, waste, and noise. ...read more.


This as a whole is how negative externalites of production function. In summery, the concept occurs when a factory obtains external costs such as smoke, waste, and noise that all effect third parties negatively. As a result, the producer is not producing a socially efficient output (QePe). It then results in market failure (over production at a low price) and welfare loss; while profit-seeking companies continue to only take account for their private costs. The producer is then making a profit while the third parties lose money. It is at this stage the government has to step in. b. One of the policies that a government could add to avoid market failures is to enforce taxes. This will minimize the welfare loss as indicated on the graph above. The government is able to minimize welfare loss with taxes by taking money and making changes for eliminating the negative externalities. The government is then able to increase the producer’s private costs which causes the MPC to move upwards as indicated above (MPC ï MPC + Tax). ...read more.


It could also produce non-consumption. Finally, the cost of setting such standards and policies could costs more than the costs of pollution. Conclusively, the government could issue tradable emission permits. This is a market-based solution to negative externalities of production. These permits issued by the government allow companies to produce pollution to a certain level (quota). Once a company is issues one, they have the right to buy, sell, and trade the permits on the market (cap and trade system). This then promotes initiative for companies to produce less pollution. If they produce over the set amount they must buy a tradable emission permit from another firm, raising its costs. Visa versa if they produce less pollution then amount issued the firm is allowed to sell their permit. This becomes an issue that does not really do much. The pollution remains and corruption among companies arises. Further, it is difficult to measure a factories pollution output. Below are examples of how firms can use these permits efficiently (right) and inefficiently (left). Notice the difference in the welfare loss (shaded in area). This is the basic concept of how negative externalities of production arise and some of the solutions available to minimize them. ...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. Extended Essay Economics

    inflation or an increased demand for paper; a significant factor for this increase in profits could arguably be the exchange rate. In the last couple of years, the gap between the fixed and parallel exchange rates has widened. A few years ago, it was 2.5 Bs to the dollar on

  2. Negative Externalities

    Look at the diagram below: However, there are some problems to this solution. First of all, it is difficult to measure accurately the pollution created and putting a value on it, which can be regained by tax. Furthermore, it is difficult to measure which firms are responsible for polluting the environment and to what extent.

  1. Essay on negative externalities

    is equal to MSB (marginal social benefit) This represents a misallocation of resources. Too much is being produced at too low a price. This can be considered a type of market failure due to negative externalities. The welfare loss to society due to extra units from Q1 to Q2 is represented by the shaded area The second

  2. Extended Essay

    The first chapter of this Extended Essay contains background information on the subject, as well as a brief treatise on the principles of the market. Consideration is also taken of the changes made and proposed by the Hungarian government, detailed throughout the Essay by analysis and relevant information from interviews, questionnaires, and government publications.

  1. Negative Externalities Essay

    becoming greater than marginal social benefits (MSBs). The government has several options to correct the situation. The first option is taxation. The government can tax the firm, in order to increase the firm's private costs. By doing so, the government shifts the marginal private cost curve (MPC curve)

  2. Economics Extended Essay - To what extent has the market for paintings in South ...

    India's average auction prices for modern works have fallen 31.5 percent to $54,385 since March 2008, ArtTactic said. The average price of contemporary Indian art has dropped 72.7 percent to $13,827."3 Effect On Master Artists: The tables below show the summation of the sale of paintings by master artists in the two time periods.

  1. free-market economy and central planned economy.

    The unemployment rate in 2002 touched 18 per cent of the labour force with one-quarter of the population estimated to be below the official poverty line. In 2000, the Polish economy was hit by the world economic slowdown, which affected the European Union and especially Germany, Poland's main trading partner.

  2. The role of MNC headquarter

    a better ways of communicating total involvement from the headquarter might seem like the best idea at first. But with the improved opportunities for communicating, it is more easy for headquarter to involve more and more. But this could be a dangerous path, as it would completely remove local initiative and responsibility, as the following will examine.

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