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Externality and Socially optimal price Essay


Human beings have tendency to be driven by self motivated interests although do not want to be perceived as servers of their own interests (Lipsey & Chrystal, 2007). However, existence of moral ethics that ought to be followed has obliged mankind to act differently especially when in groups (Keat & Abercrombie, 1991). As such, individuals might sometimes differ whenever there is collective view.

In most cases, people consider cost benefits even when it comes to working as a group (Keat & Young, 2006). An example can be derived from a group of citizens who have formed a project to develop Township Park.

When admission to the park is free and the project is supported by township government, it is highly likely that some citizens may evade maintaining the park. To some extent, they may desire act as joy-riders while benefiting without incurring any charges. Moreover, non-members may also find themselves using the park without paying maintenance cost.

On the same note, similar incident has also been observed in economics whereby buying and selling is being shared in algorithmic trade (Keat & Abercrombie, 1991). Some members act as contrarians especially when market price falls below purchase price.

Similar to a group of citizens, those who belong to a higher economic class may ignore investing their shares during low season (Lipsey & Chrystal, 2007). On the other hand, minor investors are able to buy shares during low season and sell them later during peak season.

Similarities

Inactive members of the township project take advantage of other citizens who incur the cost of maintaining the park. This causes a negative externality on active members who receive no compensation from bystanders. Additionally, in case maintenance of the park is meant to generate income; they equally fail to maximize on desired output.

On the other hand, lack of cooperation reduces chances of economic growth in maximizing their total benefit. Moreover, since progress trend is assessed for the whole group, it becomes expensive to maintain such a project with a few people who are willing.

Differences

The group of citizens may not directly benefit from park maintenance project probably because there are no dividends to be shared in the long run. However, the economic class will directly benefit from their project through profits and dividends accrued from investment.

Additionally, only a very small percentage of the economic class will evade incurring risk compared to that of park project owing to the fact that park project might not be targeted towards making profit hence making some citizens to loss interest.

Moreover, citizens may be discouraged since nonmembers enjoy using the park without incurring any cost. This might not be the case for the economic class who would usually decline participating due to low returns and high risks in investment.

In what way can you envision a set of incentives that solve either or both of the problems?

Incentives can be provided in various forms to ensure that every member from both groups remains actively involved in the project. This may entail rewarding the most active members. This will trigger competition among group members which will in the long run lead to desired goals (Lipsey & Chrystal, 2007).

Additionally, it will ensure that economic class investors remain active even when market price for shares is comparatively low. It will be imperative to use strict rules and social sanctions to ensure that those who do not participate in the project do not enjoy any benefits (Keat & Abercrombie, 1991). For instance, those who decline maintaining the park should not be allowed to use it.

Discouraging third party who benefit from the group resources can motivate active members to play active roles in the projects (Hirschey, 2009). These involve brokers who take advantage of weaker members thereby lowering returns. Additionally promoting group consensus helps in resolving issues that might not be pleasing to the group members (Hirschey, 2009).

References

Hirschey, M. (2009). Managerial economics. Mason: Cengage Learning

Keat, G. & Young, K. (2006) Managerial Economics: Economic Tools for Today’s Decision Makers. New Jersey: Prentice Hall

Keat, R. & Abercrombie, N. (1991). Enterprise culture. New York: Routledge Publishing, Inc.

Lipsey, G. & Chrystal, A. (2007). Economics. New York: Oxford University Press.

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IvyPanda. (2019, May 24). Externality and Socially optimal price. Retrieved from https://ivypanda.com/essays/externality-and-socially-optimal-price-essay/

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"Externality and Socially optimal price." IvyPanda, 24 May 2019, ivypanda.com/essays/externality-and-socially-optimal-price-essay/.

1. IvyPanda. "Externality and Socially optimal price." May 24, 2019. https://ivypanda.com/essays/externality-and-socially-optimal-price-essay/.


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IvyPanda. "Externality and Socially optimal price." May 24, 2019. https://ivypanda.com/essays/externality-and-socially-optimal-price-essay/.

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IvyPanda. 2019. "Externality and Socially optimal price." May 24, 2019. https://ivypanda.com/essays/externality-and-socially-optimal-price-essay/.

References

IvyPanda. (2019) 'Externality and Socially optimal price'. 24 May.

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