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Is it always necessary for government to intervene and internalize the profit and the cost externalities? Illustrate your answer using a real world example.

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Answer 1

Cost externalities create problems for third parties rather than the entity concerned. It is also recommended that government develop strategies sufficient to internalize costs and advantages for its members. Externalities have a way to harm both individuals and government in some form or another and that is why the government should intervene. Negative externalities reduce business profits, and this needs to be fixed by policy as it causes inefficiency.

Industries involved with production allow the gasses emitted to pollute soil. Some companies also make use of energy waste. The contamination that creates immediately impacts residents in communities nearby. The industrial discarded water is dumped into the ocean. Most fish can be killed, or even have toxins that influence people consuming them. Pollution weakens the ozone, which then introduces toxic UV (ultra violet) radiation to the human world.

We focus only on the negative externalities while there are always positive externalities. These are defined as R&D. R&D has beneficial consequences and will help not just the individual involved. R&D is known to lead to innovations and inventions like groundbreaking waste control techniques. Good externalities income has lower private returns than the collective returns.

Policy intervention is important when it comes to externalities as a means of controlling and taxation as a way of avoiding lower business outcomes. Externalities may become problems whether or when people, families and companies are not internalizing their direct costs.

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