Externalities in Business

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Definition of externalities:

Externalities recently became an important and a popular term in the business world, especially with the risen of debates and arguments about the externalities’ costs and benefits, and the ethical issues related to it. Almost everybody deals with an externality everyday but without being aware of it (kaydee, 2008).

The simple definition of says that Externality is the effect of an economic transaction which impacts somebody who was not involved in that transaction. The more complicated definition sates that Externalities can be defined as the different types of effects which impact some parties (individual or entities) as a consequence of other parties’ activities. These effects occur without any choice of the affected party and without taking their interest into account by the affecting party (kaydee, 2008).

When any economic trade occurs between two parties, they both benefit from the trade. Sometimes, a third party is being affected as well by this trade, the effect can be a negative effect or a positive one; and these effects are what we call externalities (Anon., nd).

For example, if we take any business organization as one party and the customer is the other party, they both have the trade of the organization sells or provide goods or services, and the customer pays to obtain this good or service. However, the society as a whole could be considered as a third party, any external costs the society pays or any external benefits it gains from this trade (costs and benefits not included in the market price of the goods or services) are then considered to be an externality. By breaking down this example, the business organization or the customer can be considered to be the affecting party, the society, the third party, is thus will be the affected party, the external costs and benefits are the externalities (Anon., nd).

Types of externalities:

There are two types of externalities, the positive type and negative type. The external benefits are always considered to be positive externalities, these benefits affect the outsiders in a positive way, give some advantages and without any payment required. The external costs are considered as negative externalities, these costs affect the outsider negatively, impact them in disadvantageous way, and the outsiders are forced pay these costs without any choice (Jonson, n.d.).

There are lots of examples to clarify each of the two types. The negative externality which is some analysts call it as external costs and some other call it as external diseconomies can be seen in the global warming which is considered to be number one negative externality; the change in the climate came as a result from the emissions of burning the oil, coal and gas. The water pollution as a result of adding poisons to the water or the several contaminated chemicals which are dumped by industrial plants in lands or lakes participates in harming the people, plants and animals. The over fishing which comes as a consequence from the over harvesting of a fishing company harms other fishing companies harvesting in the same ocean. The company trucks using a road may create congestion or traffic jam which impacts negatively other road users. In the animal production, the industrial farms which generate huge outputs of animal products generates a negative externalities in the form of increasing the antibiotic resistant bacteria, contamination of rivers and waters by the disposal of the animal waste. These farms as well result in another externality of the animal welfare reduction due to the close quarters where the animals are kept. The problems which may be caused by the nuclear plants when storing the nuclear waste in impropriate way, and the radioactive waste which is generated thorough the energy production of the nuclear power plants may affect the current and new generations. The external cost of health decline which is a consequence of smoking, the external cost...
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