Externality Definition Essay Example for Free

Externality Definition Essay1. An externality is defined as a realize or cost that is imposed on a third party, such as society, other than the manufacturing business or consumer of a good or service, or, much simply, an economic side effect. The more of a mathematical product that is consumed or produced, the more of an externality that results. When discussing externalities in general terms, positive externalities refer to the benefits and negative externalities refer to the cost associated with the exertion or consumption of a good or service. Public goods be one of the more common drills of positive externalities. Public goods are goods which are difficult to exclude people from benefiting from or from getting a free ride. Public goods, such as national defence, clean water, clean air, law enforcement, etc., are generally good for near, if not all of society. ostracise externalities exist in many situations. One of the most common examples is that of contaminant. In these situations, the producer and consumer finance the goods produced but society must bear the cost of pollution that is introduced into the environment as a by-product and is thus a negative externality.Using the above mentioned example of negative externality, pollution, a steel producing square might pump pollutants into the air. While the firm has to overcompensate for electricity, materials, etc., the individuals maintenance around the mill will pay for the pollution since it will cause them to have higher medical exam expenses, poorer quality of life, reduced aesthetic appeal of the air, etc. Thus the production of steel by the firm has a negative cost to the people surrounding the factory-a cost that the steel firm doesnt have to pay.2. Negative externalities are a property rights problem. Who owns the air that the steel mill pollutes? Ronald Coase put forth the solution which is cognize as the Coase Theorem Under perfect competition, once government has assigned cle arly defined property rights in contested alternatives and as long as transactions costs are negligible, private parties that generate or are affected by externalities will negotiate voluntary agreements that lead to the socially optimal resource allocation and output mix regardless of how the property rights are assigned (Ronald H. Coase, The Problem of Social Cost, The diary of Law and Economics, October 1960).In other words, if there are negligible transactions costs, as long as someone owns the rights to the air around the steel mill, the efficient outcome will prevail. For example, if the steel mill owns the rights, therefore the individuals that live around the mill will be willing to pay the steel mill not to produceup to the cost that they are incurring from health care, reduced aesthetic appeal of the air, etc. This amount that they are willing to pay becomes an opportunity cost for the steel mill if they produce. Thus they will cut production to the optimal level. On th e other hand, if the people own the air, then the steel mill would have to pay them that same amount for the right to produce. Thus the negative externality is directly added to the steel mills peripheral cost.3. Based on experience, this theorem would not apply to the steel industry case discussed above. For example, with a steel factory that trespasses on the lungs of a large number of individuals with pollution, it is difficult if not impossible for any one soul to negotiate with the producer, and there are large transaction costs. Hence the most common approach may be to regulate the firm (by imposing limits on the amount of pollution considered acceptable) while paying for the ordination and enforcement with taxes. This adds to the producers marginal cost and will cause them to reduce output.