external
(adjective)
Concerned with the public affairs of a company or other organization.
Examples of external in the following topics:
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Introducing Externalities
- An example of an externality is pollution.
- The third parties who experience external costs from a negative externality do so without consent, while the individuals who receive external benefits do not pay a cost.
- The existence of externalities can cause ethical and political problems within society.
- Air pollution caused by motor vehicles is an example of a negative externality.
- Give examples of externalities that exist in different parts of socity
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Externalities
- The cost of an externality is a negative externality , or external cost, while the benefit of an externality is a positive externality, or external benefit.
- Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.
- A voluntary exchange may reduce total economic benefit if external costs exist.
- If there exist external costs such as pollution, the good will be overproduced by a competitive market, as the producer does not take into account the external costs when producing the good.
- Positive externalities are often associated with the free rider problem.
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Positive Externalities
- Positive externalities are benefits caused by activities that affect an otherwise uninvolved party who did not choose to incur that benefit.
- In the case of positive externalities, a transaction has positive side effects for non-related parties.
- The homeowner's neighbors benefit from a positive externality.
- Since parties that create the externality aren't compensated, they do not have any incentive to create more.
- Use an example to discuss the concept of a positive externality
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Tax
- Corrective taxes incentivize economic actors to reduce the production of goods or services generating negative externalities.
- Taxes are a market-based policy option available to the government to address externalities.
- The tax is set equal to the value of the negative externality and provides incentives for allocation of resources closer to the social optimum.
- In the case of negative externalities, the social cost of an activity is greater than the private cost of the activity.
- The level of the corrective tax is intended to counterbalance the externality.
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Externalities and Impacts on Resource Allocation
- In the long run, externalities directly impact resource allocation.
- A negative externality, also called the external cost, imposes a negative effect on a third party to an economic transaction.
- Positive externalities, also referred to as external benefits, impose a positive effect on a third party.
- Air pollution from vehicles is an example of a negative externality.
- Examine externalities and how they the impact resource allocation of natural resources.
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Externality Impacts on Efficiency
- An example of a negative externality is pollution.
- An example of a positive externality would be an individual who lives by a bee farm.
- Positive and negative externalities both impact economic efficiency.
- Positive externalities are beneficial to the third party at no cost to them.
- It also shows the economic costs that are associated with externalities.
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Regulation
- The government can respond to externalities through command-and-control policies or market-based policies.
- The government can respond to externalities in two ways.
- Such measures make certain behaviors either required or forbidden with the goal of addressing the externality .
- On the other hand, if the government allows too much to be dumped in the river, they have failed to mitigate the negative externality.
- If the government is unsure of how to effectively regulate the market, it should seek other methods of mitigating the externality.
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The Coase Theorem
- The Coase theorem states that private parties can find efficient solutions to externalities without government intervention.
- This is an externality because the Smith family does not pay the Jones family for the utility received from gathering fallen pears.
- In response, the Jones family can put up a net that will prevent pears from falling on the Smith's side of the property line, eliminating the externality.
- This graph exemplifies how Coase's Theorem functions in a practical manner, underlining the effects of an externality in an economic model.
- According to the Coase theorem, two private parties will be able to bargain with each other and find an efficient solution to an externality problem.
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Internal vs. External Forces
- Net external forces (that are nonzero) change the total momentum of the system, while internal forces do not.
- External forces: forces caused by external agent outside of the system.
- All the rest of the universe becomes external.
- Since all the external forces cancel out with each other, there are no net external forces.
- Contrast the effects of external and internal forces on linear momentum and collisions
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Externalities in the Health Care Market
- Health care can impact people beyond the person receiving and the person providing the care, causing positive and negative externalities.
- A classic example of externalities is the automobile.
- In health care, the critical externality in most systems is the care provided to others.
- You benefit from a positive externality of others receiving health care.
- The basic premise of an externality is captured in this diagram, where external factors affect the internal economic system for a product or service.