Question

Differentiate between the types of externalities you have learnt and given 2 examples of each. What are some reasons for gradual escalation of unemployment rates?

Answer 1

An externality is a phenomena when one part's action affect another's person's well being and the relevant costs and benefits are not reflected in market prices. It can arise between producers and/or between consumer and producer.

Types of externalities:

There are five types of externalities:-

1) Negative externality :- It occurs when the action of one party imposes costs on another party. For eg When a steel plant dump its waste in a river on which fisherman depend on their daily catch. Another example is emission of harmful smoke from a rubber factory may make it difficult for people living in nearby residential areas.

2) Positive externality:- It occurs when action of one party benefits another party. For eg An individual planting an attractive garden in front of his house may benefit others living in the area. Another example: Appreciation in property value that result from construction of new roads, transit systems etc.

3) Network externality: It occurs when the action of one party encourages another party to purchase the same good. An individual buying a picture phone for the first time will increase the usefulness and acceptance of such phones to people who want to call her. Another example coule be Facebook likely confers positive network externalities since it is more useful to a user if more people are using it as well.

4) Pecuniary externality : It arises from a particular action taken by an individual, which benefits him and makes other people worse off. A paoperty tycoon buying up a large number of houses in a toen, causing prices to rise and therefore making other people to buy houses worse off, perhaps by excluding them from the housing market. Another example coule be when large business move into residentials, the rentals go high.

5) Common property resources : It occurs when the action of one party betrays another party to enjoy the benefits of the good by making them worse off. Harvesting by one fishing company in the ocean depletes the stock of fish available for other companies. Another example: Exclusive extraction of natural resources by one country may reduce the availability of resources for other countries.

Reasons for gradual escalation of unemployment rates are:

1. Lack of skilled and technical training: In current era, the technology have been introduced in every sphere of the job environment. Therefore, there is a specialized demand for skilled and specialized workers. Lack of skilled and technical training will thus make it difficult for an individual to earn his living.

2. Lack of education: A majority of those without employment are those who lack education. There are several causes for lack of education. In many cases, people from poor background lack money to finance their education and therefore drop out of school.

3. Underpayment: It can be very frustrating when one works without being adequately paid. Underpayment happens when the quality is not recognized. Workers have to work for long hours to make their ends meet. Underpayment leads many people to quit employment due to frustration.

4. Large population: When an economy has large workers than the labour market demands, the level of unemployment is bound to be high. It means that even skilled workers who are willing and able to work will be without jobs because of unavailability of employment vacancies.

5. Lack of job opportunities: Countries where a high number of young people have studied up to the university level but with limited job vacancies have serious unemployment problems. There is a lot of competition for the few slots available. Also in today's time, the pandemic has resulted in disruption of various kinds of job opportunities which has left people without work.