ECO final exam. Externalities. Social Sciences Assignment.

Running head: EXTERNALITIES1
Externalities
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EXTERNALITIES

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Externalities
In markets, different forces compete to maximize benefits and minimize costs. These forces could be internal or external. That is, forces affecting competition – and, for that matter, market equilibrium – could arise from internal factors at enterprises or organizations (e.g., management styles) or from external, usually uncontrollable factors (e.g., new regulations). The question of externalities is a case in point. Generally, externalities are costs or benefits, not necessarily direct or financial, affecting costs of products and services in positive or negative ways and, ultimately, causing market disequilibrium and, in extreme cases, market failure. That is, externalities are unaccounted for factors (i.e., costs or benefits, economically speaking) making producers or consumers, in case of positive externalities, gain more benefits and, in case of negative externalities, incur additional (unaccounted for) costs.
There are, as a consequence, many ways market stakeholders (e.g., producers/service providers, middle parties, regulatory bodies, policymakers, and consumers) respond to negative externalities. Consider environment stewardship. In more recent years, more and more countries are issuing laws and regulations to protect the environment against aggressive production methods, particularly in intensive production industries (e.g., cement). From a public policy perspective, protecting the environment is integral to the government's main role to act for the public good and, economically speaking, saves governments millions of dollars spent on medical services provided to individuals, if not whole communities, affected by a degradation in environmental conditions caused by environmentally unfriendly production methods. From a market competition and equilibrium perspective, however, laws and measures introduced by governments and regulatory bodies are, simply, negative externalities making higher in cost and
EXTERNALITIES

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increasingly less competitive products and services produced to consumers. That is, in incurring more costs to ensure environmentally-friendly measures at production facilities and/or operations, companies are forced to increase product/consumer costs and, ultimately, a market state of disequilibrium occurs whereby end products/services are priced higher compared to actual production/development costs.
Then again, companies and governments have come up with different solutions to respond to such market externality.
For governments, the law is one most common response, or solution, to externalities caused by environmental degradation. From a public policy perspective, as noted,...