What is a negative externality?

Negative externality is a situation where an individual or company decides, but does not have to bear the full cost or the outcome of this decision. Instead, at least part of the total cost of this decision is handed over to the company as a whole. When this type of economic phenomenon is left uncontrolled, it can lead to considerable social costs and perhaps undermine the entire or part of the market.

One example of negative externality has to do with the factory operation in the community. Within the production costs, it purchases public services and raw materials for the production of specific goods. Within the manufacturing process, the factory can release pollutants into the air or possibly throw away waste water into the local water system. The residents of the community are adversely affected by the operation of the race, because the combination of air and water pollution is likely to cause health problems that need to be treated. As a whole, the community can have a more aggressive effort to clean air and water, leading to further expendituresOutstanding to the village.

In some cases, the nature of negative externality has nothing to do with pollution, but with the production of excessive goods. This results in a reduction in the cost of producing each unit, which is a benefit for the company producing these goods. Outwardly, this higher production rate has the potential to adversely affect the ability of competitors to sell sufficient goods to stay in business. As a result, consumers ultimately have fewer options for buying brands and lower competition is moving closer to the monopoly situation. If this happens, consumers can eventually pay higher prices, simply because there is no other option.

Laws that help minimize the possibility of some negative externalities are common today. This is especially true for air and water pollution in the community. Companies that operate factories in jurisdiction are usually controlledNY to ensure that the facility complies with local and national environmental regulations. Failure to comply can lead to stiff fines that have a negative impact on the benefits that the company is based on the production process. In extreme cases, some governments are empowered to close the equipment until changes have been made to provide the operation into full compliance.

Ideally, the company itself will take steps to minimize the amount of negative externality that occurs as a result of the production process. This may be somewhat problematic for businesses with the need to change manufacturing processes or invest in expensive devices to limit the externalness range. Since these activities are likely to reduce the lower limit of society, it is not unusual businesses to observe government regulations that limit negative externality, but do little beyond what these regulations require.