Negative Externality Or Social Cost Occurs â€Myassignmenthelp.Com

Question: Discuss About The Negative Externality Or Social Cost Occurs? Answer: Introducation A negative externality or social cost occurs when the third party ends up paying the price as a result of an economic transaction they were not part of, where the first and second parties are the producer and consumer respectively, and the third part is any other individual, resource, company or company owner who is indirectly affected. Negative externalities are usually created in circumstances where there has been no allocation of property rights over resources or assets, or there has been some uncertainties (Economics Online, n.d.). A good example of this would be since no one owns oceans and it cannot say to be anyones private property, companies feel like they can pollute water without any persecutions which emphasize the importance of property rights for the development of economies. Social costs may when companies have failed to include them when they are doing calculations concerning the costs of production. This mistake is usually made because social costs cannot be measured using financial data on which production decisions are centered. An example of this would be when a company decides to expand in a new location and doing the calculations the cost that people who live in that area will accrue due to the noise or smoke level, for instance, was not accounted for which would produce economic results that do not benefit the society because the people living in that area were not included when the company was making the decision to expand to that area. So the only people who will be benefiting are the owners of the company who wont be affected by the increased noise or smoke level. Although companies could solve negative externalities by internalizing the costs third parties have to pay, many of them could afford it; so the next best option is for governments to step up and resolve the issues. Negative externalities create a market failure and impact the economic efficiency, so governments have to intervene to address that inefficiency. In an optimally efficient market, there is a perfect allocation of resources to whom need them in appropriate amounts. In an efficient economy, the society uses resources to produce a satisfying amount of goods and services that are is superior to other societies using fewer resources. In efficient markets, however, there is no allocation so it creates a disorder where some may take way too many resources for themselves while others are left with scraps. By intervening the government fight against these inequalities by various means such as regulations, subsidies, and taxation. Source (Adhikari,, 2016) With a Q* output, social marginal cost is greater than the social marginal benefit. Social efficiency will occur at Qm and at Qc there are externalities cost occurring. In some occasions, governments intervene to maximize social welfare. Certain corporations out there their power especially in monopolies to cause chaos in the market by increasing entry costs and preventing the development of infrastructure which weakens resources, subdue innovation and minimize trade. In this case, the government interferes by creating strict regulations to minimize negative externalities. In other occasions, the government interferes to reduce the damages natural economic events such as recession and inflation caused. In this case, the government interferes using subsidies and manipulate the money supply to reduce the impact. Promoting fairness in the economy, in general, could be another reason for government interference. Taxation and welfare programs would be the best options when a situation like arises because it will facilitate reallocation of financial resources from the most profitable companies to those who are most in need. A case for negative externalities is the one that happened in Kathmandu, Nepal where due to the rapid growth of urbanization, squatter settlements have increased. Although squatter settlements play an important role in Kathmandus economic growth, they have created various negative externalities because they are unorganized. Policy makers have found it challenging to solve this problem because of it would be greatly beneficial for Nepal if its cities develop. Nevertheless, negative externalities cannot be left unresolved. The governments intervention is related to counseling, education, and awareness of the public (Adhikari, 2016). It is important to note that squatter settlements are inevitable especially as cities develop because they will produce the economies of scale and agglomeration economies that will attract many people. All the negative externalities created by squatter settlements cannot be fixed quickly; with this consideration in mind, the primary thing the government can do is taking the time to educate, counsel and create awareness into the public in order to change their attitude towards squatter settlements. Governments can use numerous strategies to make this happen; the Nepal government used the enabling approach. With the enabling approach, the government does not take a confrontationist or defensive position with the public; instead, it develops an environment that will enable people to find exclusive local solutions for their accommodation problems by teaching them how to use and generate resources on their own (Adhikari,, 2016). Negative externalities disturb the price equilibrium which makes it inaccurately reflect the actual costs and benefit of services or products. When there is an equilibrium in a perfectly competitive market, there is a balance between the buyers' benefits and producers' costs in order to produce an optimal level of production (Fundamental Finance, n.d.). When this does not occur the social marginal costs will surpass the private marginal costs which will affect the competition in the market because companies will produce a higher output than that of the optimal level. In a monopoly, the situation would be different. The produced output would be lower than that of the optimal level. When a market failure caused by negative externalities, monopolies would be socially preferable to perfectly competitive markets. For instance, when a negative externality like pollution occurs as a byproduct of increased manufacturing activities, a perfectly competitive market would produce more output (pollution) than a monopoly would (Pearson Education, n.d.). In this case, the production of more output would not be economically efficient because more resources than required are being used hence the pollution. Of course, a monopoly is the last option governments ever consider because they are better options to solving problems such as pollution such as regulating the market. References Adhikari, S., R. (2016). Externalities in Kathmandu. Singapore: Springer Economics Online. (n.d.). Negative externalities. Retrieved from https://www.economicsonline.co.uk/Market_failures/Externalities.html Fundamental Finance. (n.d.). Negative Externality. Retrieved from https://economics.fundamentalfinance.com/negative-externality.php Pearson Education. (n.d.). Monopoly and Externalities. 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