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 is a consequence of an economic activity experienced by unrelated third parties; it can be either positive or negative. For instance, the impact of a well-educated labour force on productivity in a given firm is an example of a positive externality. Lower taxes on marijuana may harm the third parties for instance through impaired driving.
Main content
Most externalities are negative. Pollution, for example, is a well-known negative externality. A corporation may decide to cut costs and increase profits by implementing new operations that are more harmful to the environment. The corporation realizes costs in the form of expanding its operations but also generate returns that are higher than the prices. However, the externality also increases the aggregate cost to the economy and society, making it a negative externality. Externalities are negative when the social costs outweigh the private costs.
Some externalities are positive. Positive externalities occur when there is a positive gain on both the personal level and social level. So, while a company such as Google profits off of its Maps application, society as a whole dramatically benefits in the form of a useful GPS tool. Positive externalities have public, or social, returns that are higher than the private returns.
Summary
Given that externalities are either negative or positive, it is essential to regulate tax practices that foster negative externalities. At the same time, we can support those practices that contribute to the good of the third parties.