Question

Give an example of a positive or negative externality related to your work experience or your own personal experience. Explain the external cost or external benefit in your example. Also be sure to explain whether it is a real or pecuniary externality. Suggest remedies for real externalities (policies, cooperative agreements, market approaches etc.)

Answer 1

Externality is a situation in which a third-party is harmed or benefitted from a production or consumption activity. Externality can be positive or negative. We can see the presence of externalities in different demensions of our life, including work environment.

Now let's look at an externality that occurs in work environment.

Lets assume that , a club openes close to an office and loud music from the club can be heard in the office. This music causes disturbance to employees who work all day. This an example of negative externality. Cost of this negative externality is the inconvenience faced by the employees of the office and those people who visited the office for different reasons.

The externality mentioned above is a real externality because it affects the output produced by the Employees in the office . It doesn't work through prices as in the case of pecuniary externality.

Now let's look at remedies for real externality.

* One way we can get rid of real externalities is by getting into contracts. For example the club and office mentioned above can get into contract deciding on working hours that's acceptable to all and that won't cause such an issue.

* Similarly a cooperative agreement can be signed between the parties concerned with the issue of externalities

* Government intervention via policies can also be effective in getting rid of externalities. In the above example, if a policy was implemented dictating norms regarding the location of the club , the negative externality won't have occurred.

* Externalities may also be corrected by what are known as market approaches by which externalities are simply internalize; that is they are incorporated as cost of manufacturing a product.An excellent example of this is the trading of sulphur dioxide emissions.