Negative Externalities In Decision Making

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Externalities occur when cost or benefits accrue to a person, or persons,who are not involve in the decision making process. It is improtant to note that externalities can involve either third party costs (where could be a negative externality ) or third party benefits ( this could be a positive externality). Negative externality Negative externalities occurs when a decision or activity imposes costs on anyone not involved in making that decision. We can think of it this way, every decision involves some costs to the decision maker; that is the private cost of your choice. Where the COST OF INDIVIDUAL = PRIVATE COST. However, sometimes the decisions imposes costs on others as well, which would be the external cost. Social cost then, is the total cost of all members of society/ the sum of the cost to the decision maker (which is private cost), and to others (external cost). This means that if a decision imposes any kind of external cost, then the social cost will exceed the private cost. For an instant example, do we think that too many people use their mobiles while…show more content…
Just as an individual can make choices that impose costs on others, you can also make choices that result in benefits to others. If that is the case, then social benefits equal the private benefits/benefits to the decision maker, add with external benefits/benefits to others. In positive externality, social benefits exceed the private benefits (SOCIAL BENEFITS > PRIVATE BENEFITS). As the example that I got from class, education is a positive externality. If you decided to continue your education; what is the reason could be? What are the benefits for you by the decision? It might be the intention or because you know that education means a better and high pay jobs after graduation. But what about the society? It as a whole benefits from having a better-educated populace;highly-educated, highly skilled workers tend to be innovators, which helps the economy to move
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