Introduction: Externalities and its Major Causes

Unlock access to all the studying documents.

View Full Document

PLEASE ATTACH THIS DECLARATION ON TO THE FRONT OF YOUR

ASSIGNMENT

Student Name: _____Pardis Shahriari_______________________________________

Student Number: ___32354219_____________________________________________

Unit Code/Title:

__BUS171____________________________________________________

Assignment Number and Name: ______Externalities________________________

Tutor’s Name (not lecturer): ___Loretta Dumas_____________________________

Tutorial Day/Time (internal students): ____Tuesday (8.30 – 10.30_______________

Your assignment should meet the following requirements. Please confirm (by ticking the

boxes) that your assignment:

 Is presented on A4 size paper

 Is printed one side only and 1.5 or double spaced (or as per the unit information)

 has a margin of 2.5cm on the left-hand side of the page

 is firmly stapled; and

 has the declaration below signed

DECLARATION

• Except where indicated, the work I am submitting in this assignment is my own work and

has not been submitted for assessment in another unit.

• This submission complies with Murdoch University’s academic integrity commitments. I

am aware that information about plagiarism and associated penalties can be found in the

assessment policy. If I have any doubts or queries about this, I am further aware that I can

contact my Unit Coordinator prior to submitting the assignment.

• I acknowledge that the assessor of this assignment may, for the purpose of assessing this

assignment:

▪ Reproduce this assignment and provide a copy to another academic staff member;

and/or

▪ Submit a copy of this assignment to a plagiarism-checking service. This web-based

service may retain a copy of this work for the sole purpose of subsequent plagiarism

checking, but has a legal agreement with the University that it will not share or

reproduce it in any form.

• I have retained a copy of this assignment.

Signed: ______________________________Date:_____________________________________

IT IS YOUR RESPONSIBILITY TO ENSURE THAT THIS ASSIGNMENT IS

SUBMITTED IN ACCORDANCE WITH THE INSTRUCTIONS IN THE UNIT

INFORMATION AND LEARNING GUIDE OR ON LMS.

NOTE: FRONT DESK RECEPTION CANNOT TAKE RESPONSIBILITY FOR

RECEIPT OF ASSIGNMENTS.

Introduction: Externalities and its Major Causes

This paper discusses how positive and negative externalities can be detrimental to economic

efficiency and how corrective models such as Pigouvian Tax and property rights can minimise the

risk of market failure. Externalities can be positive (negative) and it is defined as a benefit (cost)

that affects people who are not directly involved in the consumption or production of that good

(Hubbard and O’Brien, 2013). Market failure occurs when economically efficient choices deviate

from privately optimal choices (Gillingham and Kenneth, 2010) and it causes discrepancy between

the private marginal benefits (costs) and social marginal benefits (costs) in either production or

consumption (Hubbard and O’Brien, 2013). This deviation between the two benefits (costs) makes

the market allocatively inefficient. This paper focuses on corrective measures that can mitigate

positive consumption externalities and negative production externalities to improve net social

welfare.

Difficulties in enforcing property rights in public goods is intangible and immeasurable, hence, it

is considered as one of the major culprits that causes externalities (Hubbard and O’Brien, 2013).

This difficulty arises with public goods due to the two characteristics that public goods have; non-

excludability and non-rivalry. Meaning that Non-payers cannot be excluded from using these

products and the consumption of the good by one unit would not reduce anyone else’s share, such

as, weather prediction or national defence (Mankiw, 2011). Another cause for some externalities

can result from “common pool resources” (CPR). CPRs are the resource systems created by

naturally or by humans which are large enough and therefore costly to exclude potential

beneficiaries and users (Carpenter, 1998). Unlike public goods, CPRs can be depleted by the use

of others, therefore, free rider problem of externality will arise and individuals using them would

be indifferent to the externalities that they inflict on others by using them (Tietenberg and Lewis,

2009).

Positive Consumption Externalities

When the consumption of a good causes

benefits to person uninvolved in the

process, Social benefit would be larger

than the Private benefit and this results

in the social marginal benefit curve to be

above private marginal benefit, which

leads to positive consumption

externalities (Hubbard and O’Brien,