Question

1) What are some other examples of industries where externalities have a significant presence?

2) Although standardization is necessary in order to fully reap the benefits a winner-take-all industry often give rise to monopolistic tendencies, such as the case of Microsoft. Are there some cases where it is more beneficial to consumers to have standardized products than a competitive market structure? What would be the costs and benefits of a lack of competition in such industries? Explain.

Answer 1

1. Externalities are the incidental effects that the activities or actions of one party have on another party.

Positive externalities occur when the actions of a person or entity have a positive impact on an unrelated party.

Negative externalities occur when a party's actions have an adverse impact on other individuals or entities.

Examples:

i) Construction:

When you construct a new building for your business you may create a negative externality in the form of traffic because your clients will clog the surrounding roads. This means that people who live nearby will have to set aside more time to complete road trips and to run errands. However, if you build your new office or factory in a derelict part of town then you help to rejuvenate the area. You create various positive externalities, ranging from increasing property prices to increased revenue for nearby restaurants and gas stations.

ii) Online:

If you decide to start accepting online payments for your goods and services then you create various negative externalities. Your clients no longer have to buy paper checks to make payments, which means lost revenue for check-printing firms. Furthermore, banks can lay off employees in charge of processing checks if large numbers of firms start conducting transactions online. However, you also create some positive externalities because your competitors may have to buy software or computer terminals in order to send and receive electronic funds, which means increased revenue for technology firms.

2) Costs and benefis of a lack of competition:

i) If there was no competition in the markets, companies woud neglect technological development and cost reduction efforts. Price and service would become more advantageous to companies, and consumers would result in no receipt of benefits.

ii) If different stores did not compete with each other and talked to each other to raise the price, we would only be able to buy the same product at the same price, wherever we went shopping.

iii) If manufacturers decided on the stores' selling prices, the stores would not be able to compete on price. We would have to buy the same product at a high price, wherever we went shopping.

iv) If successful bidders for public works were chosen by underhand discussions between the bidders, the cost of the public works would be higher than the original cost adequate to the works. This would result in a waste of our taxes.