EXTERNALITIES BUSINESS ORGANIZATIONS

Externalities Business Organizations

Externalities Business Organizations

Introduction

Externalities are the costs or benefits from activities engaged in by one set of economic agents that affect other economic agents who are not directly engaged in the activity. For example, the noise from aircraft overhead diminishes the utility (see total utility) or happiness of individuals living in areas surrounding an airport. The diminished utility resulting from noisy aircraft is an external cost of production. Furthermore, external costs or benefits may occur in either the production or consumption of a good, or both. An example of an external benefit in consumption is the pleasure enjoyed by the neighbors of an individual who plants a flower bed. Generally, goods or activities with external benefits are called public goods (see public-goods problem), and the term externality typically refers to an external cost. Other common examples of externalities are industrial pollution, automobile emissions, and traffic congestion.

This paper has addressed the economic issue of "negative externalities" and suggests some policy solutions to this problem. One approach to addressing the problem of negative externalities is to figure out a way to get economic decision-makers to internalize the external costs. In this regard, there is a need to discover a way to close the gap between social costs and private costs. In this paper, I have argued what economic policy solutions can remove an obstacle i.e., negative externalities to efficiency and how.

There are alternative approaches to reducing pollution and it may be noted here that no one policy is best in all sorts of situations and economies. The policy has to be devised as per the economic, cultural, political and other conditions in a specific country. There are several approaches to reducing pollution. One is that producers need to be educated and told about the harms of pollution to the society. Secondly, certain restrictions should be made on the production of certain goods and services. Thirdly, we can tax according to the economic efficiencies of the products.

External Cost or Benefits

External costs or benefits prevent markets from achieving an efficient allocation of resources (see efficiency). The market will allocate too many resources to the production of goods with external costs and too few to the production of goods with external benefits. For example, ticket prices will not equal the true marginal cost if airlines do not take into account the harm imposed on others by their noisy aircraft. Consequently, more resources will be devoted to air travel than in an efficient allocation.

Externalities may require a public sector response in order to remedy the misallocation of resources. There are three tools for controlling externalities: regulation, property rights, and taxes. Frequently, governments issue extensive regulations requiring industry to reduce the external costs associated with certain activities. An important instance of the federal government using regulation to control an externality is the automobile emission standards contained in the Clean Air Act.

Command and control type regulation lacks the necessary flexibility for individuals and companies to find more efficient methods of reducing external ...