EXTERNALITIES

Presented by:

Nida Nafees

And

Fatima Naseem Khan

INTRODUCTION:

Externalities occur when producing or consuming a good causes an impact on third parties not directly related to the transaction.

Externalities can either be positive or negative. They can also occur from production or consumption

Positive Externality: occurs when the consumption or production of a good causes a benefit to a third party.

Negative externalities: occur when the consumption or production of a good causes a harmful effect to a third party.

THE POSITIVE EXTERNALITIES OF CHILD CARE AND MARKET FAILURE:

 An article was published in StarTribune about the problems in the daycare market – especially in rural areas and especially for infant care.

It’s become a problem for businesses and for the rural economy, because parents can’t find good enough daycare for their kids, and so either miss work or have to quit their jobs altogether.

Child care serves an early childhood education function, and early education prepares kids for school, which sets them on a tax-paying, law-abiding path that is good for the economy and society.

But that value is long-term and spills over to all of society — not just to the child and her parents.

The “social marginal benefit” exceeds the “private marginal benefit“. So there's a stalemate. Parents can't pay much more, providers can't charge much more, and yet providers aren't making much money. This is likely because of the spillover benefits.

Economics tells us that when spillover benefits are present, the market tends to produce too little.

Essentially, child care is like education. It provides massive value that doesn’t show up in the price, which helps explain why there aren’t more options for rural parents. Supply isn’t keeping up with demand, because of market failure.

DUVALL COMMUNITY ‘DESERVES BETTER’(A CASE OF NEGATIVE EXTERNALITY)

a 24-hour Super Walmart is not appropriate for Duvall Village, a small, neighborhood plaza only 100 feet from the nearest homes.

Crime: A number of studies have shown

that where Walmart goes, crime follows. A study of 551 Walmart stores nationwide reported an average of 269 police incidents annually. That is roughly one call to police every 32.5 hours. On average, once every two months, a Walmart will be the site of what the FBI terms a “serious crime,”

 Economic Impact: While Walmart claims they will be creating jobs,

multiple studies have demonstrated that Walmart actually causes a net loss in jobs in surrounding communities.

On average, for every two jobs Walmart creates, they destroy three others by forcing other businesses to reduce their workforces or close down entirely.

 

Property Values: there may still be negative externalities that

affect households that live very close to a Walmart ... it is possible that in certain cases a new store may actually decrease housing values due to externalities.”

A different study out of Colorado College says, “proximity to one or more big box stores delays home sales and diminishes home property values in that area.”

So the community claims that WalMart should not enter Duvall because of so many negative externalities. They say that they deserve better than a 24-hour Super Walmart.

EXCESSIVE USE OF PESTICIDES IN DEVELOPING COUNTRIES HAS LED TO HEALTH AND

ENVIRONMENTAL PROBLEMS (NEGATIVE EXTERNALITIES)

Deep concern is expressed about the excessive use of pesticides in developing countries, which is reported to have led to environmental degradation.

Pesticides affect not only the location of their application but also the ecosystems far removed due to their mobility in air and water. Further, pesticides usually kill pests and their natural enemies alike.

Pesticide-related poisoning could occur in human beings as a result of excessive exposure to pesticides, through inhalation or on consuming heavily or untimely pesticide-treated crops.

the pesticide users are hardly aware of the negative externalities on the environment.

In the absence of government intervention through regulations and taxation, they tend to overuse pesticides

Marothia (1997) reports that nearly 70 per cent of all pesticides consumed by Indian farmers belong to banned or severely restricted categories in the developed countries.

It has been estimated that only 10 per cent of the total food grains production can be saved from increased pesticide use.

Once the health hazards and other costs are imputed, these benefits appear too meager.

The deadly impact of these chemicals has caused destruction of several types of fish and aquatic organisms in recent years.

The report emphasizes that the private benefits of pesticides use should be evaluated against their social costs.

PUBLIC SECTOR REMEDIES FOR EXTERNALITIES

1. Mergers: Internalizing the externality by merging the involved parties.

2. Social Convections: Social norms convections can be seen as attempts to force people to take into account the externalities they generate.

3. Bargaining and the Coase theorem: Assigning ownership rights because once the ownership rights to a resource are established( regardless of who is assigned) individuals can bargain their way to an efficient outcome.

GOVERNMENT RESPONSES TO EXTERNALITIES:

1. Regulations:under regulation in the case of polution each polluter is asked to reduce polution by a certaion amount or else face legal sanctions.

2. Pigovian taxes or subsidies:a tax is levied on each unit of polluter’s output equal to marginal damage and subsidies are given in the case of positive externalities.

3. Marketable permits:Government creates a market for externality by selling permits for negative externalities.

CONCLUSION:

Which of these methods will lead to the most efficient regulatory outcome depends on factors such as the heterogeneity of the firms being regulated, the flexibility embedded in quantity regulation, and the uncertainty over the costs of externality reduction.

REFERENCES:

http://www.startribune.com/the-positive-externalities-of-child-care-and-market-failure/272590051/

http://www.dawn.com/news/1172250 http://www.economicshelp.org/micro-economi

c-essays/marketfailure/negative-externality/