Oates provided a comprehensive review of the literature on externalities in Theory of Environmental Policy. Pigou used the example of alcohol having external costs, such as creating more demand for police and health care. See: Tax on negative externalities Economists on negative externalitiesĪrthur Pigou 1920 introduced the concept of externalities in The Economics of Welfare. This means that consumers pay close to the full social cost. To achieve a more socially efficient outcome, the government could try to tax the good with negative externalities. This is because individuals fail to take into account the costs to other people. If goods or services have negative externalities, then we will get market failure. Social efficiency occurs at a lower output (Q2) – where social marginal benefit = social marginal cost.The red triangle is the area of dead-weight welfare loss.But at this output, the social marginal cost is greater than the social marginal benefit. Consuming cigarettes causes passive smoking to others in the vacinity.ĭiagram of negative externality in consumption.Consuming loud music late at night keeps your neighbours awake.Consuming alcohol leads to an increase in drunkenness, increased risk of car accidents and social disorder.Examples of negative externalities of consumption In this case, the social benefit is less than the private benefit. This occurs when consuming a good causes a harmful effect to a third party. It indicates the area of overconsumption (where SMC is greater than PMC) Negative externality of consumption The red triangle is the area of deadweight welfare loss. Social efficiency occurs at Q2 where Social marginal cost = Social marginal benefit.This is socially inefficient because at Q1 – SMC> SMB.Therefore output will be at Q1 (where Demand = Supply). In a free market, producers ignore the external costs to others.Because of the external costs the social marginal cost is greater than the private marginal cost.Producing beef in South America involves cutting down Amazon rainforest, which has an impact on global climate and local environment.Producing conventional vegetables with pesticides causes carcinogens to get into the environment.Burning coal for energy creates pollution.Therefore the social cost is greater than the private cost.Įxamples of negative production externalities When producing a good causes a harmful effect to a third party.With a negative externality the Social Cost > Private Cost.Social cost is the total cost to society it includes both private and external costs.The negative externalities are – pollution to other people, possible accident to other other people, and time other people sit in traffic jams. The personal cost of driving are buying car, petrol, your time.The externalities of driving a car to work If you build a new road, the external cost is the loss of a beautiful landscape which people can no longer enjoy. These are both external costs imposed on other people who live in the city. If you drive a car, it creates air pollution and contributes to congestion. This loss of income will be the negative externality. If you produce chemicals and cause pollution as a side effect, then local fishermen will not be able to catch fish. If you play loud music at night, your neighbour may not be able to sleep. Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |