Negative Externalities Examples

1464 Words6 Pages

How negative externalities are a form of market failure and the welfare losses that can result from it and how government can intervene to address the market failure.
Within this essay I shall investigate how negative externalities produced by the consumption and production of demerit goods inflict an economic cost upon a third party. The production of harmful carbon emissions and the consumption of demerit goods shall be used as an example to highlight how government can intervene to reduce the associated welfare loss.
Negative externalities are the effect of an economic decision, production or consumption, inflicted upon a person, or people, “that is not specified as a benefit or liability in a contract.” (The CORE project, 2017) The production …show more content…

Whilst there is a private benefit this is much greater than the external cost meaning that there is a misallocation of resources, there is an overuse of fossil fuels, causing a negative externality of production due to environmental spill over.
Moreover, a negative externality of consumption may also be incurred by the over consumption of demerit goods such as alcohol, cigarettes, junk food and gambling. The over consumption of these goods results in costs to people outside of the market transaction. Using alcohol as an example these costs include treating illnesses for alcohol consumption, police efforts dealing with drunken behaviour and car crashes involving drunk drivers. The negative consumption externality is shown in figure …show more content…

These are pollution rights issued to firms and cap the level of pollution from economic activities. Government may increase the price of such caps to increase the opportunity cost to firms that pollute excessively, whilst the funds raised may be reinvested as government spending to further reduce the effects of pollution on society.
Government may also introduce legislation to reduce the negative externalities associated with negative externalities. Examples of this include laws to regulate where and when people can drive, drink and gamble or laws on the minimum age of alcohol and smoking. However, the problem of underground, black, markets may arise from this in addition to a possible reduction in the quality of goods affected.
In conclusion government may wish to combine both market based policies with legislation to make the consumption and production of demerit goods in order to reduce negative externalities. Both policies should be used in cases where consumption s price inelastic and the use of a tax floor or tax may be unable to internalise the

Open Document