Introduction
Negative externalities are the costs that arise from activities or processes that affect uninvolved parties who do not choose to incur such an outlay. On the contrary, positive externalities signify transactions that benefit a non-related party. For instance, a real estate agency that keeps its houses well-maintained may make the neighborhood benefit through increased home values.
Main body
The rationale for negative externalities, also referred to as social costs, arising is that the involved company does not usually consider such expenditures while computing the cost of production (Hoffmann, Inderst, & Moslener, 2017). Production expenses are often based on monetary information while social costs are not calculated in the same way. For instance, when a corporation chooses to start a new plant, it may fail to mull over the costs incurred by the surrounding community for drinking water that has been polluted by the company’s operations. On this note, products that should not be manufactured since their total expenses surpass the proceeds end up being produced when the social costs are not incorporated in the cost of production.
Intervention by the government is crucial as it seeks to charge companies for negative externalities. Governments may either employ laws (for instance, forbidding a given process) or market solutions (Bond & Goldstein, 2015). The application of strategies such as pollution penalties, allowing civil proceedings by private players to get paid for damages emanating from careless practices, and charging environmental levies may make the government realize two things. To start with, government intervention makes it possible to recover money to assist in fixing damages attributable to negative externalities (Ajefu & Barde, 2015).
Conclusion
Moreover, government intervention may help set a monetary value on social costs. This will go a long way to making companies obtain a correct figure for the cost of production and avoid manufacturing goods whose prices are less than the outlay incurred.
References
Ajefu, J., & Barde, J. (2015). Market efficiency and government intervention revisited: What do recent evidence tell us. Journal of International Business and Economics, 3(1), 20-23. Web.
Bond, P., & Goldstein, I. (2015). Government intervention and information aggregation by prices. The Journal of Finance, 70(6), 2777-2812. Web.
Hoffmann, F., Inderst, R., & Moslener, U. (2017). Taxing externalities under financing constraints. The Economic Journal, 127(606), 2478-2503. Web.