Externalities

One factor cause of market failure is an externality, which is general in virtually in every range of economic activities. Externality is the impact of one person’s actions on the well being of a bystander (Nicholas, 2012). Besides, externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid (Geoff, 2012). An externality can be either positive or negative which can create whether better-off or worse-off to people. “A positive externality is a positive effect or benefit created by a third party resulting from a transaction which they had no direct involvement. In financial transaction, a positive externality provides benefits to individuals in the form of spillover” (Businessdictionary, n.d.). On the other hand, a negative externality occurs when production or consumption carry out external costs on third parties outside of the market (Geoff, 2012). It reflected a market failure because the level of production and consumption of a good and service is higher than what the society requires. Negative externalities occurred in many situations in economic activities. One most the classic example of negative externalities is pollution and depletion of natural resources. In the pollution situation, the consumer and producer bargain the goods and services produced, but the society must bear cost of pollution that launched into environment. For instance, in the year 2006, Thailand suffered its worst flooding in half a century, leaving critical effects to the country’s economy, agricultural, tourism, industrial sector and society (Thaiwater, 2011). Because of the affects on these, unemployment has happened due to the closure of multiple factories. Thus, Thailand’s government must bear the costs of damages due to the pollution and this increase the burden of the government. One of the main factors that caused the flood is deforestation (Seth, 2011). Without doubt that the forested landscapes

References: Geoff, R. (2012 September 23). Negative Externalities. Retrieved from http://www.tutor2u.net/economics/revision-notes/as-marketfailure-negative-externalities.html Andrew, W. (2011 October 30). Has forest clearing contributed to Thailand’s flood? Retrieved from http://asiapacific.anu.edu.au/newmandala/2011/10/30/has-forest-clearing-contributed-to-thailands-floods/ Seth, M. (2011 October 13). As Thailand Floods Spread, Experts Blame Officials, Not Rains. Retrieved from http://www.nytimes.com/2011/10/14/world/asia/a-natural-disaster-in-thailand-guided-by-human-hand.html?_r=0 Thaiwater. ( 2012 March 14). 2011 Thailand Flood Executive Summary. Retrieved from http://www.thaiwater.net/web/index.php/ourworks2554/379-2011flood-summary.html