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Running Head: NEGATIVE EXTERNALITY
Externalities in economics refer to the benefits or costs received or incurred by the third
party who has no control whatsoever on its creation. There can be negative or positive
externalities, and the benefits and costs can occur to both organizations and individuals that
consume or produce goods or services. Most externalities are technical and have a significant
impact on the opportunities for production or consumption among unrelated third parties.
Pollution that results from the production of oil by industries is an example of a negative
externality. This research paper explores the ways on how governments internalize the negative
externalities in oil production.
Governments and economists interested in environmental protection always aim to
internalize the external benefits and costs to make the industries and individuals who create
negative externalities include them in decision making. Producers do not always take
responsibility for any external damages which impact society, especially when there is no
regulation in the market. Most operations and activities, including transportation and
manufacturing, rely on oil products such as petroleum. However, the social costs of producing
oil outweigh the private costs, which make it a negative externality. Oil producers always cut
operational costs to increase their profits by using machines and equipment that cause harm to
the environment. Some of the negative externalities that result from oil production include
environmental pollution, economic costs, security risks, and health risks such as illnesses and
injuries (Soto-Onate & Caballero, 2017). The environmental contamination resulting from the
activities of oil production leads to adverse effects...
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