EXTERNALITIES 1

Externalities

Students Name:

Institution
EXTERNALITIES 2

How the government can Influence Positive and Negative Externalities.

Externalities arise in an economy once the consumption or production of a particular

service or goods influences a third party who is not linked directly to the consumption or

production of that product or service (Cornes, 1986). Externalities are overspill benefits and

costs. When an expense spills over, a negative externality arises. If a profit spills over, a

beneficial externality arises. Thus, externalities occur when the transaction's costs or benefits fall

on someone who is not the manufacturer or the buyer.

Negative Externalities

Over the past several weeks, a town with one of Parkruns 'largest populations, Canberra, has

gone without people. So dense and unhealthy was the pollution coming in from bush fires nationally

that two of the eight Parkruns in Canberra and neighboring Queanbeyan were deserted for some time.

There existed an impact on the economy as well. Individuals were expected to go to a coffee shop after

each Parkrun to have a coffee or a slice of banana pie. The smoke resulted in several small enterprises

going out for four weeks. This is an instance of the negative externality effect (Wright, 2020). From an

economic point of view, the company is pivoting some of its manufacturing costs to society. The

company uses cleaner air in its manufacturing process — a tool it does not reimburse for — and releases

toxic air to the environment, which poses a possible health risk for those breathing it. If the company

paid the full manufacturing expense, it would bring clean air back into the environment. If the

community wants fresh air, then the community has to pay to clean it up. For this situation, pollution

reflects the transfer of some of the production costs to the community, a negative externality.

Correcting Negative Externalities

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The government can play a significant part in mitigating negative externalities through

taxing products as it creates spillover costs from their output. This taxation significantly raises

the manufacturing costs for these products (Laffont, 2008). The increased expense, then, best

represents the actual manufacturing cost as it covers the expense of, perhaps, pollution spillover.

Such taxation seeks to make the manufacturer responsible for the entire output expense. For

instance, on January 1, 2018, federal environmental tax policy was introduced by the Chinese

administration, permanently eliminating the contaminant pollution fee which had been in place

over the last four decades. The Environmental Protection Tax implied the start of several other

new measures aimed at reducing China's pollutants, which would inevitably impact companies,

mainly processing companies, although in different ways (Cicenia, 2018). The economic theory

is built through primary hypotheses on how human beings act, tackle the question of scarcity and

react to change (Mankiw, 2017). Scarcity pertains to the fundamental economic issue, the

disparity around minimal resources, and technically unlimited wills. This situation demands

individuals to make choices about how to productively apportion resources to meet fundamental

requirements and as many other requirements as conceivable. The government employed the tax

to drive up the manufacturing cost to curb the negative externalities. This tax altered the equation

of the customer choice, and they sort other alternatives that they'd never normally consider; it is

because the state has foreclosed an option they always had and preferred to other choices that are

present after the increase in taxes. This will lower the purchases of the goods by the customer

and hence reduce its production. The higher taxes would also result in higher manufacturing

costs forcing the company to choose lowering its manufacturing, thereby lowering emission

rates.

Positive Externalities
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People get a private profit when they acquire education. But there are advantages for the

rest of the community as well. The many benefits of your schooling usually spill over to the

community. To put it another way, you create positive externalities. For instance, more schooling

contributes to increased productivity for the employee and improved standards of living for the

community at large. While education has several spillover benefits, educational facilities are not

getting all the profit they would gain if the transaction's real benefits were entirely accepted.

Simply put, educational producers are not adequately paid for the rewards that go through

society. Consequently, educational producers might under produce education.

Encouraging Positive Externalities

By offering subsidies for services and products that produce spillover benefits, the

government may play a vital role in promoting positive externalities. A state subsidy is a benefit

that indirectly reduces the expense of a product or service being generated (Laffont, 2008). These

subsidies supply companies with an incentive to improve the production of services or goods,

resulting in positive externalities. Since the spillover profits go to the community, federal

subsidies are a means for the community to share the expense of creating positive externalities.

Concerning economic theory, regarding education, the scarcity of income earned by educational

providers contributes to lower production of education in communities (Mankiw, 2015). This

circumstance pushes the government to agree to increase its subsidiaries to improve and maintain

the development of education and thus increase its benefits for society. For example, as part of a

national multimillion-dollar plan, Many of Victoria's top learners will be included in intensive

programs to support high-achieving kids participate and succeed. $40 million will be granted to

public schools to compensate for resources to facilitate education. The institutions will also
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receive a $1.2 million infusion of funds that will provide continuing education and training for

teachers (Ilanbey and Carey, 2019). These policies will improve education in Victoria by

increasing the number of Victorian pupils in NAPLAN outcomes in the top two assessment

categories.

Ultimately, by taxing services and goods that create spillover expenses, the state can deter

negative externalities. Through subsidizing products and services that produce spillover

advantages, the government will promote positive externalities.

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References

Cicenia, A. (2018). China’s Environmental Protection Tax. China Briefing. Accessed on April 1,

2020, from https://www.china-briefing.com/news/china-environmental-protection-tax/

Cornes, R., and Todd, S. (1986). The Theory of Externalities, Public Goods, and Club Goods.

Cambridge, United Kingdom: Cambridge University Press.

Ilanbey, S and Carey, A. (2020). New $60m package unveiled for Victoria's brightest students.

The Age. Retrieved on April 2, 2020, from

https://www.theage.com.au/national/victoria/new-60m-package-unveiled-for-victoria-s-

brighteststudents-20191024-p533pe.htm

Laffont, J. (2008) “Externalities,” in The New Palgrave Dictionary of Economics, ed. by Steven

N. Durlauf and Lawrence E. Blume (London: Palgrave Macmillan).

Mankiw, N. G. (2015). Essentials of economics. Stamford, CT: Cengage Learning. 7th Ed.

Wright, S. (2020). Economic effect of disasters runs deeper than we think. The Age. Retrieved

on April 2, 2020, from https://www.theage.com.au/politics/federal/economic-effect-of-

disasters-runs-deeper-than-we-think20200120-p53sw9.html