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ECONOMICS ESSAY
Table of Contents
Answer to Question 1    3
Answer to Question 2    5
References    8
Answer to Question 1
Negative Externality
The cost which is suffered by a bystander or a third party is called negative externality. Negative externality is a result of an economic activity. In a buying-selling or a market transaction the first and second parties are the buyers and sellers. The third party includes an individual or an organisation. It might also be a property owner or resource that is directly affected by the economic transaction. The impact is indirect in nature. Externalities are sometimes preferred as spillover effects. A negative externality is synonymous to external costs. Examples of negative externalities can be waste which is generated through consumption. A second example is carbon dioxide which is a by- product of production.
A situation where property rights or resources have not been allocated and are uncertain is when an externality arises. The importance of implementing property rights is crucial so that nobody has the right to pollute or damage a specific resource. An example of an ocean can be cited in this regard. An ocean is a public property and no one has a property over it, ships can pollute it without any fear of facing repercussions (Williams, 2018). The objective of implementing property rights is central to the idea of Peruvian economists. Economists Hernando that a successful market requires a widespread allocation of property rights for the potential development of the market.
The negative externality or external costs is elaborated through the following diagram.
Figure 1: Negative Production Externalities
(Source: www.economicsonline.co.uk, 2020)
The MPC is the marginal private cost. The cost incurred as a result of an external activity is shown in the MSC, which is the marginal social cost. The MSC is higher than the MPC is the given diagram. MSC is to the left of the MPC curve. This suggests that the externality exists and the costs are negative in nature. The socially efficient output is where the marginal social cost intersects the marginal social benefit at the quantity level Q1.
Impact of Negative Externality
Net Welfare Loss
Figure 2: Net Welfare Loss
(Source: www.economicsonline.co.uk, 2020)
The above diagram projects the loss which results in the existence of negative externality. The shaded triangle of ABC depicts the loss incurred by the society or a bystander, due to the presence of an externality. This loss would not have existed in the absence of negative externality.
Remedies
Externality is the cost to the government. Externalities are used to advocate legal responsibilities. Positive externalities are allowed to exist in the marker whereas negative externality is the bared is to exist. To withstand the impact of negative externality the application of Coase theorem is implemented (Williams, 2018). Ronald Coase puts forward a solution to the problem of externality. Once the government has set forth property rights in capitals and transactions. It is observed that the private organisations which cause externalities deliberately proclaim that there are no social costs being implemented. The alternative remedies to the problem of externality are:
Taxation- a government has the right to increase private expenses to meet the social expenses inflicted by the private sector. The...