See also: Socialist Economy Examples Negative externalities of production and consumption with examples In simple terms, negative externalities are the harmful effects to a third party (anyone other than the producer or direct consumer) that are the resultant effect of the production or consumption of a good or service. It has also served as an influential contributor to the enactment of market-based regulatory systems in the control of negative externalities. This is in a situation where there are no costs associated with the negotiation process.Īlthough this theorem falls short of being practically implemented in reality due to the major assumption that negotiations between third parties and the producers or consumers who cause the negative externalities are costless, it still serves as an important reminder that there is still room for negotiation and reaching mutually beneficial compromises when dealing with negative externalities. In this theorem, he postulated that corporate organizations and individuals can negotiate socially desirable and mutually beneficial outcomes when faced with market inefficiencies that result from externalities irrespective of who has the right to a clean environment or to pollute the environment. This theorem was developed in 1960 by British American economist, Ronald Coase. One theory that seeks to minimize the negative externalities that may result due to economic activities is the Coase theorem. Negative externalities are usually part of the process of production and consumption and if they are not adequately managed, they could cause inefficiencies in the economy that may result in market failures. The existence of negative externalities generally results in some kind of cost to the third party which could be in form of monetary loss or increased spending to manage the negative externality or an effect on the health and general well-being of the third party. Negative externalities are created when the economic transactions or activities of companies or individuals pose an external cost to a third party without their consent or prior knowledge. Negative externalities may affect the environment, individuals, organizations, resources, countries, or even the globe entirely as is the case with global warming. This cost is usually imposed on a third party that is not directly involved with the production or consumption of the good or service that caused the negative outcome. Negative externality refers to the external cost of production or consumption. See also: Examples of Classical Liberalism But before we delve fully into the examples of negative externalities, let us understand negative externalities. In this article, our focus shall be on examples of negative externalities in everyday life and in other areas that affect society. Generally, there are two types of externalities or spillover effects due to economic transactions these are positive and negative externalities.Įxternalities that are beneficial to the third party are positive externalities whereas those that are detrimental to the third party are negative externalities. Externalities generally refer to the benefit or cost experienced by a third party as a result of the occurrence of an economic transaction. Hence, any impact on individuals who are neither the first nor second parties is considered an externality. In any economic transaction, two parties are generally involved the producer or first party and the consumer or second party. These are usually the negative impacts that arise from the production or consumption of goods and services.
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