You are here

Externalities

22 December, 2015 - 14:13

A negative externality is one resulting, perhaps, from the polluting activity of a producer, or the emission of greenhouse gases into the atmosphere. A positive externality is one where the activity of one individual confers a benefit on others. An example here is where individuals choose to get immunized against a particular illness. As more people become immune, the lower is the probability that the illness can propagate itself through hosts and therefore the greater the benefits to those not immunized.

Solutions to these market failures come in several forms: government taxes and subsidies, or quota systems that place limits on the production of products generating externalities. Such solutions were explored in Chapter 5. Taxes on gasoline discourage its use and therefore reduce the emission of poisons into the atmosphere. Taxes on cigarettes and alcohol lower the consumption of goods that may place an additional demand on our publicly-funded health system. The provision of free, or low-cost, immunization against specific diseases to children benefits the whole population.

These measures attempt to compensate for the absence of a market in certain activities. Producers may have no great desire to pay for the right to emit pollutants, and consequently if the government steps in to counter such an externality, the government is effectively implementing a solution to the missing market.