Economics: Negative Production and Consumption Externalities

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Describe and evaluate economic policy measures that can be used to reduce negative consumption and negative production externalities.

Economic policy making is often a field of government decision-making or academia that is regularly filled with confusing terminology and definitions to the average person and thus somewhat confusing, this article looks at two of these such terms; ‘negative production externalities and negative consumption externalities’ and attempts to dissect their nature and makeup to some degree. However, before one can start down this pathway and examine, expand and evaluate two of the important economic policy options available in regards to understanding and influencing ‘negative production and consumption externalities’ one must first make an effort to explain what these two economic and trade terms actually mean in both policy language and real world terminology.

According to one leading academic source, the University of Berkley department of Environmental Economics and Policy ; ‘Negative Production Externalities’ can be defined as: the production activities of one individual or organization that causes the imposition of cost/benefits on other individuals that are not transmitted accurately through the market at large. While the term ‘Negative Consumption Externalities’ is defined as being; the consumption activities of one individual or entity that causes the imposing of cost/benefits onto other individuals that are not correctly shown within the market, both these definitions are also settled upon within text books such as ‘Economics 4th Edition ’.

Now that a clear concise economic definition has been given for both of these important terms, it obviously worthwhile to expand upon these definitions and provide examples in a real-world sense, which will enable a more competent level of understanding, for those reading this paper. ‘Production and Consumption Externalities’ often include events and situations, arising from ‘market failure’ due to price mechanism problems, such as the following; air pollution from coal power, ground water pollution from fertilizer use, food contamination and toxic exposure to food workers from pesticides, soil erosion from seaside construction.

With an obvious amount of groundwork having been laid towards explaining these terms, it is critical that we explain and examine why ‘Externalities’, as they are often referred to when written within economic texts and papers and will be referred to throughout this paper, are of such importance to economic policy making and what actual policy measures are available for use in diluting their economic effects and impact and how influential these particular policies may or may not be. The study of ‘Externality’ effects is exceedingly important to typical economics strategy for it deals specifically with the associated problems generated by negative production and negative consumption inside the market. But regardless of the overall importance to basic economics, this study is an obvious cornerstone to simple understanding of global markets and cost/benefit decisions made by various groups and, more so now however than at any time in the past, in the shaping of new economic debates, in the advent of ‘Climate Change’, such as ‘Economic Environmental Policy’ decision-making and is often associated with discussion surrounding ‘property rights’ . Although if one were to examine local government policy and zoning then ‘negative externality’ decisions would be quite evident. This sudden shift and policy inclusion has been quite evident in the current global warming debate, and highlighted by the associated costs to the community created by these global changes and the benefits that can be produced through subsidies and investment opportunities as a way of reducing the implications.

‘Externalities’ are measured in terms of ‘Social Marginal Cost’ (SMC) and Private ‘Marginal Benefit’ (PMB), which measures the costs and...
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