Over Supply Of Negative Externalities

565 Words3 Pages
Question2 (a) Discuss fully, were possible citing specific example, why there is always a tendency of an over supply of a negative externality than a positive externality Externalities are costs or benefits of a transaction that are incurred or received by other members of the society but not taken into account by parties to the transaction. Externalities can be negative or positive. A negative externality occurs if an activity creates costs (harm or discomfort) for uninvolved people. Examples of negative externalities are cars and factories which generate air pollution that affects people’s health. Cars entering congested freeways impose time costs on other drivers, as all cars slow down as a result. A positive externality occurs if an activity creates benefits for uninvolved people. Examples of positive externalities are people who get vaccinations against a communicable disease reduce other people’s chances of getting the disease. People who improve their property may create benefits for their neighbors by creating a more pleasing neighborhood and increasing property values. As much as negative externality is undesirable in practice there is a tendency of it’s over supply compared to positive externalities. The overproduction of goods with negative externalities occurs because the price of the good to the buyer does not cover all of the costs of producing or consuming the good and also there are no property rights. If a company that manufactures steel products dumps its waste into a nearby river people living down stream will be affected through contaminated water and this cost is not borne by the company hence able to maintain lower prices on their products. If all costs were accounted for, the prices of these goods would be higher and people would consume less of them. The illustration below shows the effect of the social penalty on demand and

More about Over Supply Of Negative Externalities

Open Document