Externality and their regulation
Hey everybody, today I am going to talk about the concept of externalities and why they matter in tax economy. An externality refers to the outcome of an economic practice to third parties. The result may be positive or negative. For instance, a highly experienced and educated workforce may increase productivity within a firm. In such a case, we can say that the externality is positive. Lower taxes on marijuana may harm the third parties lets say through impaired driving. Both positive and negative externalities may cause what is commonly known as market failure.
Main content
An externality occurs when a third party experience an adverse outcome due to the production or consumption of a particular good. A positive effect following the consumption of given good results to positive externality. For instance, an educated workforce may only benefit the company in which they work. But, the competent workforce may foster the nation’s economic growth through innovative production of goods and services. On the other hand, smokers not only threaten their health, but second-hand smoke is dangerous to the bystanders too.
When the manufacturing firms emit poisonous gases and pollute the air, the clean-up costs and health costs affect the society at large. The un-involved parties experience such costs without their consent. However, the firm owners benefit without having to pay any fee. Now the only solution is to internalize the costs. But this is almost financially impossible. This is where government intervention comes in to address such market failure.
As we mentioned earlier, not all externalities are negative. A company such as Google may benefit from Maps application. But at the same time, the community can befit from the use of GPS tools. In this case, the public benefits become higher than private returns.
Summary
externalities are either negative or positive. Therefore it is essential to regulate economic practices that foster negative externalities. At the same time, we can support those practices that contribute to the good of the third parties.