Question

. Explain in detail, the economic effects of spillover costs i. Provide specifics starting with the firm avoiding costs (how and why that happens) and conclude by explaining the nature of the market failure and what it really means.

Answer 1

Spillover cost also known as a negative externality is a term used to describe some loss or damage that a market transaction causes a third party. The third party ends up paying for the transaction in some way, even though it was neither the buyer nor the seller and had no part in the original decision.

Spillover costs that affect society at large and reach a critical mass may be corrected by the government. The unpaid cost of a particular product may be added back in the form of taxes or other charges that the manufacturer or consumer must pay. The government may pass laws to directly address the negative spillover effect, such as prohibiting smoking in public places or requiring a company to switch to nonpolluting manufacturing processes. Some have noted that spillover costs often result from poorly defined property rights, and that is property rights were clearly defined, interested parties would negotiate a privately paid settlement.