Negative Effects Of Externalities
Externalities
Externality is an economical effect felt by a third party, a person who is neither the producer nor the consumer of the good. Externalities can either be positive or negative. Positive externalities have a positive effect on the third party, while the negative externalities have a negative effect on the third party. Externality occur when there difference between social and private cost/benefits.
For instance, a company pollutes a pond with its wastes. The third party in this case would be those who are affected by the polluted water, like the residents around the pond. They are likely to get water-borne diseases and if they are not compensated by the company, then it is a negative externality. If the residents are compensated
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When a firms cost of production affects a third party’s well being negatively without being compensated, it is known as a negative production externality.
ECONOMICS OF NEGATIVE PRODUCTION EXTERNALITIES
Private marginal cost (PMC): This is a cost incurred by a producer while producing a good or service.
External cost: This is an additional associated with the production of a good usually imposed on a third party.
Social marginal cost (SMC = PMC + MD): is the change in society 's total cost brought about by the production of an additional unit of a good or service.
ECONOMICS OF NEGATIVE EXTERNALITIES
Private cost is a cost of activities involved in the production of the good.
External costs is the cost of an activity/activities to the society.
Social cost is the addition of private cost and external cost.
Private benefit is the satisfaction derived by consumers.
External benefit is the pleasure an activity gives to a third party.
Social benefit is the addition of private and external benefits.
GRAPH OF NEGATIVE
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The tax is likely to be regressive.
Also putting cost on “sugary drinks” is very difficult, because it is difficult to distinguish between sugar sweetened drinks and non-sugar sweetened drinks for example if you take sugar with your tea, is it referred to a sugar sweetened drink?
On the supply curve, a tax moves the curve to the left. But, the impact of tax depends on the elasticity of demand. If demand is elastic, there will be a small fall in demand if higher tax is imposed. When demand is elastic, government will see a great increase in their tax revenue.
2Another policy that that would be effective is Ban. Ban is a legal prohibition of the use of something. For instance, the government places a ban of the consumption and selling of large sized drinks, there would be a reduction in the amount of sugary drinks a person consumes at once. The limitation is that this may only lead to people buying more small sized
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