ASSIGNMENT ON ACC313.

TOPIC: EXTERNALITY.
QUESTION;
{1} Explain the terms, Externality?
{2} Using exmaple from the Nigeria society, briefly
discuss the form of externality?
Solution;
{1} Externality can be discribe as the third-party
imparts arising from the production and
consumption of goods and services for which no
appropriate compensation is paid or taken.
Bringing this perspective to the market economy, this
generally means that an externality happens when
there is a direct effect of the actions of one person or
firm on the welfare of another person or firm in a
way which is not transmitted by market prices.
Externality can arise from the effects that
consumption of an item by one consumer may have
on the welfare of others or from the effects that the
production of one product may have on the
production possibilities of others.

{2} FORMS OF EXTERNALITY.

From the Nigeria society, there are basically two (2)
forms of externality that we can discuss; (i) Negative
externality, and (ii) Positive externality.
(i) Negative externality. This is a case where a
producer should put into consideration that the
producer should not face the entire cost of
prodution. For instance, an oil refinery firm will
generate water, air and land pollution in the
production enviroment or region. The water
pollution, air pollution and land pollution makes the
community around the oil refinery worsen/harmful.
However, there are social costs [Water, air and land
pollution] to the production of oil which the oil
firm/refinery ignore or negelected. Here, there is
market failure, and the reason for market failure is
that the market participants do not factor or put into
consideration the full social cost of harmful
economic activities.
There is divergence between social costs and private
costs which is the "Negative Externality".
(ii) Positive Externality.This is a situation where the
products of a producer is of equal benefits to the
producer and for the consumers of the products or
services.
A good example of this illustration, is the health
service provider. The services render by the health
worker's are of great benefits to the consumer of the
service, and the producer as well. More importantly,
it does not have any harmful or negative effects on
either sides.
That means, the social costs will automatically be
equal to the social benefits.