Externalities Essay

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Essay 3 When businesses find ways to internalize externalities they can make more money. Discuss why shopping malls charge a low price per square meter to department stores like Galeria Kaufhof, a medium price to stores like H& M, and a high price per square meter to jewelry stores and food vendors. “Externalities are the costs or benefits that affect people who are not directly involved in the production or consumption of a good or a service.” 1Thus, externalities are not limited to the parties participating in the market i.e. to producers and consumers but also affect other people in the society. Externalities cause deadweight loss which can lead to market failure. Businesses can make more money if they can internalize the externalities. Externalities can be internalized if the transaction cost of the business is low. “Transaction costs are the costs of identifying and bringing buyers and sellers together, bargaining and drawing up a contract”2and it is relatively high for department stores like Galeria Kaufhof in comparison to stores like H&M. Similarly, the transaction cost for stores such as H&M is more than that of the jewelry shops but less than the department stores. Also, it is much harder for a business enterprise to internalize if it has high transaction cost. Thus, jewelry shops can internalize at an easier way as they have comparatively lower transaction costs. Since, jewelry shops can internalize in an easier way, theoretically, they should make more money. And it is only fair that the shop that makes more money has to pay more rent. Department stores such as Galeria Kaufhof have wide range and amount of products whereas specialized stores such as H&M and jewelry stores have limited. Thus, department stores attract more people and those people are usually inclined to look around other stores such as H&M and the jewelry store. This increases mall traffic

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