MYTUTOR SUBJECT ANSWERS

543 views

What are negative externalities?

A negative externality is defined as the cost suffered by a third party (not involved in the transaction) as a result of the transaction. The consumer and producer are the two main parties in the transaction, but a third party is negatively effected by it taking place. An example of this can be water pollution from the production of chemicals leaking into a lake and killing fish, this would affect fishing in a lake. The fishermen in the lake are the third party who are negatively affected.

Negative externalities represent a type of market failure, as the the free market has not accounted for the full cost of the good. This means that the price set by the free market is below the true cost of the good. The negative externality is often called the 'social cost' of a good, and it is not taken into account in the free market price of a good. The true cost of the good is the social cost + the private cost.

In order to correct this market failure, governments can impose a tax on the good to raise the price. This will increase the price, so it is equal to the true cost of the good being produced. The tax can then be used to compensate the negatively affected party so they are no longer making a welfare loss as a result of the transaction taking place. Looking at the above example, the tax money can be paid to the fisherman in order to make up for the lost income as a result of the water pollution.

James J. A Level Maths tutor, A Level Economics tutor, GCSE Maths tut...

2 years ago

Answered by James, an A Level Economics tutor with MyTutor


Still stuck? Get one-to-one help from a personally interviewed subject specialist

56 SUBJECT SPECIALISTS

£36 /hr

Adam B.

Degree: Economics and Mathematics (Bachelors) - Bristol University

Subjects offered:Economics, Maths+ 1 more

Economics
Maths
Further Mathematics

“Hi!  I'm an enthuthiastic and motivated tutor with a commitment to developing my student's understanding of concepts within their chosen subjects.  As an Economics and Mathematics undergraduate I am committed to delivering a tailored...”

£20 /hr

Chris B.

Degree: Economics (Bachelors) - Durham University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
Further Mathematics
-Personal Statements-

“About me: I am currently in my first year of studying Economics at Durham University. I have been tutoring maths for about two years now, so have had plenty of experience passing on my knowledge and interest in my subjects to younger ...”

£20 /hr

Stavria K.

Degree: Economics (Bachelors) - Lancaster University

Subjects offered:Economics, -Personal Statements-

Economics
-Personal Statements-

“ME: I am currently in my second year in Lancaster University; studying Economics BSc. I am always intrigued and passionate about Economics. As a social science, it explores human behaviour and it combines the theories of the optimal a...”

About the author

James J.

Currently unavailable: for regular students

Degree: Economics (Bachelors) - Bristol University

Subjects offered:Economics, Maths+ 2 more

Economics
Maths
Geography
Further Mathematics

“Hi I'm James, an economics student at Bristol. I'm looking to tutor in maths and economics at GCSE and A-Level. ”

You may also like...

Other A Level Economics questions

Discuss the impact of an increase in income tax on labour markets.

Explain the 'Economic Problem' and how this closely links to the principles of demand and supply and how this ultimately determines the price of goods.

Outline and evaluate the economic effects of a fall in the value of the dollar?

How can changes in the interest rate affect aggregate demand?

View A Level Economics tutors

We use cookies to improve your site experience. By continuing to use this website, we'll assume that you're OK with this. Dismiss

mtw:mercury1:status:ok