Externalities are costs or benefits not expressed in a market and hence
not internalized in buyers’ or sellers’ market decisions.”
his essay shall outline externalities’ various attributes, and discuss some
of their different solutions, in particular private ownership, the Coasetheorem, and the role of government.
Externalities can be positive (such as a healthy population) or negative (such aspollution). Some are as a result of production, while some are as a result of consumption (e.g. smoking). Take the example of a factory located by a river,
which is a source of a fisherman’s produce. In a free market economy the factory
will try to maximize profits and will not take its pollution into account. However,by polluting the river it is imposing a cost on the fisherman which is not internalised
in other words, a negative externality. On the other hand, if it released some beneficial nutrients into the river this would be of benefit to thefisherman
a positive externality. Either way, the market outcome is inefficient,because the social cost is not taken into account. The true marginal cost of supply consists of the private marginal cost which the markets take into account,plus the marginal costs associated with externalities, which the markets do not.It should be noted that in most cases externalities are unintended side effects.
“There is no goodwill intended
from a positive externality and no malice
intended from a negative externality.” Most people who seek a good education
do so in their own interests, in terms of job opportunities, income, etc. Thebenefit to society of having a well-educated workforce is not taken intoconsideration. Similarly, smokers do not actively seek to create anuncomfortable environment for others who may be in the same room as them.The positivity or negativity of an externality can often be quite subjective. If alarge music
venue’s music is so loud that people who live in the area can hear it,
those who like the music would consider it a positive externality, while those
who don’t would consider it a negative one.