Externality And

Its Implication On
The Economy

A brief overview.....
TABLE OF CONTENTS.
01 02 03

Importance of
Introduction to externality. How externality arises ?
studying externality.

04 05 06

Externality in different
Classification of externality. Causes of externality.
domains of economics.
TABLE OF CONTENTS.
07 08 09

Different ways to deal with Private solutions to externality. Coase Theorem.

externality.
 Why to study externality?
● Helps in maintaining the economic equilibrium to its maximum.
● Helps in maintaining social welfare.
● Helps in minimising the negative impact of externality on
economy.
Classifications of Externality
Externality is classified depending upon the consequence of the
transaction.
 Classifications of Externality
Externality

Positive Externality Negative Externality

Positive Production Negative

Externality Positive Consumption
Negative
Consumption Production Externality
Externality Externality
 POSITIVE
EXTERNALITY
 TYPES OF POSITIVE EXTERNALITY
POSITIVE
PRODUCTION
EXTERNALITY
 When a firm's production increases
the well-being of others but the firm
is not compensated by those others.
POSITIVE
CONSUMPTION
EXTERNALITY
 When an individual's consumption
increases the well-being of others
but the individual is not
compensated by those others.
EXAMPLES
 NEGATIVE
EXTERNALITY
TYPES OF NEGATIVE EXTERNALITY
NEGATIVE
CONSUMPTION
EXTERNALITY
 When an individual's
consumption reduces the well-
being of others who are not
compensated by the individuals.
NEGATIVE PRODUCTION
EXTERNALITY
 When a firm's production reduces
the well-being of others who are
not compensated by the firm.
EXAMPLES
 Causes of Externality
● Free market economy based on the sole motive of self-profitization.
● Due to non-excludable and non-rival public goods.
● Households and firms do not pay enough value to these public goods.
CASE STUDY :
EXTERNALITIES DUE
TO COVID-19
NEGATIVE EXTERNALITY :
POACHING
 Due to fear of COVID-19, central and state governments were compelled to
impose partial or total lockdown across the country.

 Official Reports suggest that there was a widespread increase in

wild animal poaching during lockdown.
 Current situation of lockdown is having a significantly negative impact
on wildlife conservation.
 Live pangolins and their scales were seized from poachers in
Uttarakhand, Karnataka, and Odisha.
 Cases have been reported from forests located
in human dominated landscapes and also from
declared protected areas such as designated tiger reserves, national
parks, wildlife sanctuaries, Bird sanctuaries and others.
 SOLUTION :
The central government took a proactive step to classify forest and
wildlife protection as 'essential activities' during country-wide
lockdown, so that the routine work of wildlife law enforcement
agencies should remain largely unaffected.
 POSITIVE EXTERNALITY
BREATHING FRESH : INSIGHTS TO POSITIVE EXTERNALITIES
OF LOCKDOWN IN INDIAN MEGACITIES
 Due to the lockdown, the air pollution levels have significantly reduced.
 According to the data of the Central Pollution Control Board (CPCB), which
provides air quality index for 103 cities, 90 percent of the cities air quality has
improved to satisfactory levels.
 It apparently has the linkage with limiting economic activities and a
sudden decrease in vehicles on road due to lockdown. The current
world’s most traffic-congested city, Bengaluru, was breathing well in
this lockdown period. Bengaluru has achieved air quality of “Good”
category by fifth week of lockdown.
 CO and NO2 levels were decreasing. Increase in ozone concentration
during that period was noticed which has been linked to as a result of
the reduction in NO2 levels.
The world’s economy has already experienced a downfall, but
nature and wildlife have started to reclaim their lost spaces to
humans. Bengaluru residents spotted peacocks roaming freely in the
busiest localities. Folks have been fortunate during this period to
witness chirping and singing of birds such as cuckoo, sparrow,
woodpeckers in their backyards and gardens.
 CASE STUDY CONCLUSION
Through systematic planning based on the findings of this study, it is possible to
enhance the positive impact and minimize the adverse impact of the lockdown
caused by future pandemic or disastrous events like COVID-19. Main
recommendations that could be given for future environmental planning are - to
enhance remote working facilities, cleaner design, use of internet of things,
automation, systematic lockdown, and inclusion of hazardous waste management in
disaster planning.
 WAYS OF
CORRECTING
EXTERNALITIES
 Role of Government
The government can deal with
externalities in one of the two ways :-
● Command and control policies.
● Market based policies.
COMMAND AND CONTROL POLICIES :
REGULATION
● It regulates the behavior directly.
● The government can remedy an externality by making certain
behaviors either required and forbidden.
● If external costs to society far exceed the benefits then government
institutes this policy to prohibit this act altogether.
 MARKET BASED
POLICIES
● By applying corrective taxes and subsidies
● By tradable pollution permits
 PRIVATE SOLUTIONS
TO EXTERNALITIES
● Moral Codes And Social Sanctions
● Charities
● Government Should Promote By Allowing Income Tax Deduction
For Charitable Donations
● By Using Contract For The Interested Parties
 COASE THEOREM

Private Economic Actors Can Solve The Problem

Of Externalities Among Themselves
IF YOU'RE IN A SYSTEM WHERE
YOU MUST MAKE PROFIT IN
ORDER TO SURVIVE, YOU ARE
COMPELLED TO IGNORE
NEGATIVE EXTERNALITIES.

NOAM CHOMSKY
THANK A VAGISH ADINAD

YOU! AADHYA ROHISH

AALOK KUMAR
ABHINAV VERMA
ADARSH S KAMATAGI
TEAM1:- ROLL NO 1 TO 6 ADITYA KUMAR
SAHRAWAT

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