Externality Research Paper

1696 Words 7 Pages
Externality is the effect of an economics decisions which is done by one parties on the unrelated parties who did not have a choice and whose interests were not taken into account and it cause the market become inefficient. Externalities are spillover effects that fall on parties not otherwise involved in a market as a producer or a consumer of a good or service.
Externality can be negative or positive.
Positive Externality Negative externality
Is beneficial
Increase social benefits
Leads market to produce a smaller quantity than socially desirable Effect to bystanders Is unfavorable
Increase social cost
Leads market to produce a larger quantity than socially desireable.
• A farmer who grows apple trees provides a benefit to
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Social cost is the sum of private cost and external cost.
Private cost is the cost need to pay by firms themselves. For an examples, firms have to pay salary to their workers ,and the salary is count as private cost. External cost is the cost that cause by firms but have to pay by the unrelated third parties. For an examples, when factory A is producing some kind of product. They cause pollutions during the process of producing the product. Those people live nearby have to endure the consequences of the pollution and they did not get the reparations from factory A, the cost which have to pay by those people is external cost.
Social benefits is the benefits gains by the whole society. Social benefits is the sum of the private value and external
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Eg. Profits earn by selling their product. External benefits is the value gain by the unrelated third parties.

Positive externality

When positive externality happened ,the social benefits is greater than the private value.

Under normal condition, the equilibrium of the market will at (Q1,P1) because of Demand= Supply to reach equilibrium market. However, this is socially inefficient because they ignore the social benefits which bring by positive externality and the social cost < Social benefits and the optimal output is greater than the equilibrium quantity. The social benefit of the goods exceeds the private benefit of the goods. Therefore, there is under consumption of positive externality. So, the socially optimum output will occur at( Q2 ,P2) where social cost is equal to social benefits.
To achieving the socially optimal output, the government may internalizing the positives externality by giving subsides to the producer to increase the equilibrium quantity to the socially desirable quantity.

Negative Externality

Negative externality happened, the social cost must be greater than private

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