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Why Externalities Can Make Market Outcomes Inefficient

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sofia university

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Running head: EXTERNALITIES 1

Externalities

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EXTERNALITIES 2

Why externalities can make market outcomes inefficient?

In business, an externality is simply an economic stint that refers to some benefit or cost

that a third party receives. In most cases, the third parties tend to have limited or no control over

benefit or cost creation. Most business experts claim that an externality is likely to be negative or

positive (Congdon, Mullainathan & Kling, 2010). Chances are that externalities are likely to

stem from goods consumption or production. Normally, externalities tend to occur in specific

economies where goods consumption/production is likely to affect a third party (Mankiw, &

Hakes, 2007). In this case, the third party is unlikely to be related to the good production or

consumption directly.

Apart from environmental concerns, under provision of goods, abuse of monopoly power,

the primary reason as to why most markets fail is because of externalities (negative and positive).

Pollution is perhaps the most common model of a negative externality. In situations where an

organization produces environmental pollutants, it fails to bear the full production costs.

Therefore, it is likely to yield more compared to the socially efficient quantity (Mankiw &

Hakes, 2007). Externalities such as pollution in most cases results in ineptitude within the market

because most producers tend to assume some of the external costs in which they enact on third

parties. In the end, it leads market discomfort. On the other hand, negative externalities tend to

cause inefficiency in market outcomes because most producers are likely to receive imbalanced

profits. Receiving unequal profits in this case is likely to discourage the producers into engaging

in more business in future, something that could be result in negative externalities thus making

the outcomes within the market inefficient (Mankiw & Hakes, 2007).

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Running head: EXTERNALITIES 1 Externalities Name Professor Course Date EXTERNALITIES 2 Why externalities can make market outcomes inefficient? In business, an externality is simply an economic stint that refers to some benefit or cost that a third party receives. In most cases, the third parties tend to have limited or no control over benefit or cost creation. Most business experts claim that an externality is likely to be negative or positive (Congdon, Mullainathan & Kling, 2010). Chances are that externalities are likely to stem from goods consumption or production. Normally, externalities tend to occur in specific economies where goods consumption/production is likely to affect a third party (Mankiw, & Hakes, 2007). In this case, the third party is unlikely to be related to the good production or consumption directly. Apart from environmental concerns, under provision of goods, abuse of monopoly power, the primary reason as to why most markets fail is because of externalities (negative and positive). Pollution is perhaps the most common model of a negative externality. In situations where an organization produces environmental pollutants, it fails to bear the full producti ...
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