![]() ![]() In practice, the most important externalities are those which affect the environment, and it is these which have received widespread adverse publicity in recent years, and which have prompted the rise of 'green' pressure groups and political parties. It can be seen from this table that there are in fact four different varieties of externality:Ī) a production externality: initiated in production and received in production ī) a mixed externality: initiated in production, but received in consumption Ĭ) a consumption externality: initiated in consumption and received in consumption ĭ) a mixed externality: initiated in consumption, but received in production.Įach of these are sub-divided into two, according to whether they are experienced as an external cost or as an external benefit, giving a total of eight varieties.įigure 1 The various kinds of externality The above example of an externality is one which is commonly cited, but it is important to establish at this stage that there are various types of externalities and that they can be classified in different ways: they can arise from acts of consumption or production, and can thus be production, consumption or mixed externalities, and, as previously mentioned they can be experienced as external costs (negative externalities) or as external benefits (positive externalities).įigure 1 below summarises the different possibilities and provides some examples. the problem is due to an absence of communal property rights and of a system of planned production. Those on the political left would be more likely to argue that such an externality would arise because of the market system which is based upon the private ownership of resources, with individuals acting in their own self interest and therefore not having to consider what is in the public interest i.e. Thus a firm may feel free to dump effluent into a river as the spoiling of the environment and the killing of fish is not a cost which it would directly have to bear. Property rights refer to those laws and rules which establish rights relating to: Another way of putting this is to say individuals have no private property rights over such resources as the air sea and rivers, and thus ignore them in making their production and consumption decisions. Proponents of laissez-faire would argue that externalities particularly arise because of the absence of markets - as no markets exist for such things as clean air and seas, beautiful views or tranquillity, economic agents are not obliged to take them into account when formulating their production and consumption decisions, which are based on private costs and benefits i.e. The key feature of an externality is that it is initiated and experienced, not through the operation of the price system, but outside the market. ![]() Externalities are sometimes referred to as 'by-products', 'spillover effects', 'neighbourhood effects' 'third-party effects' or 'side-effects', as the generator of the externality, either producers or consumers, or both, impose costs or benefits on others who are not responsible for initiating the effect. Positive and negative externalities What are externalities?Įxternalities are costs (negative externalities) or benefits (positive externalities), which are not reflected in free market prices. Section 2.4 Market failure - simulations and activities.Section 2.4 Market failure - in the news.Regulation, legislation and direct controls.Possible government responses to externalities. ![]()
0 Comments
Leave a Reply. |