SOCS 325 Discussion Externalities

March 8, 2022
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SOCS 325 Discussion Externalities

SOCS 325 Discussion Externalities

Students are required to include one Video Media Upload
(Record/Upload Media) for each graded topic, each week.

For Video-Media Upload instructions, refer to Resources in
Introduction and Resources

Define “externalities” as they relate to the price
of goods and services, and examine how they can distort market forces of supply
and demand, detailing both positive and negative effects.

DQ2 ADVANCES IN TECHNOLOGY

Students are required to include one Video Media Upload
(Record/Upload Media) for each graded topic, each week.

For Video-Media Upload instructions, refer to Resources in
Introduction and Resources

Describe and explain the relationship between the advances
in technology and such goals as reduced human workloads, environmental and
resource stresses, free time, and contentment.

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SOCS 325 Discussion Externalities

SOCS 325 Discussion Externalities

An externality is a cost or benefit of an economic activity experienced by an unrelated third party. The external cost or benefit is not reflected in the final cost or benefit of a good or service. Therefore, economists generally view externalities as a serious problem that makes markets inefficient, leading to market failures. The externalities are the main catalysts that lead to the tragedy of the commons.

Externality

The primary cause of externalities is poorly defined property rights. The ambiguous ownership of certain things may create a situation when some market agents start to consume or produce more while the part of the cost or benefit is inherited or received by an unrelated party. Environmental items, including air, water, and wildlife, are the most common examples of things with poorly defined property rights.

Types of Externalities
Generally, externalities are categorized as either negative or positive.

1. Negative externality
A negative externality is a negative consequence of an economic activity experienced by an unrelated third party. The majority of externalities are negative. Some negative externalities, such as the different kinds of environmental pollution, are especially harmful due to their significant adverse effects. Negative externalities are divided into production and consumption externalities.

Examples of negative production externalities include:

Air pollution: A factory burns fossil fuels to produce goods. The people living in the nearby area and the workers of the factory suffer from the deteriorating air quality.
Water pollution: a tanker spills oil, destroying the wildlife in the sea and affecting the people living in coastal areas.
Noise pollution: People living near a large airport suffer from high noise levels.

Some examples of negative consumption externalities are:

Passive smoking: Smoking results in negative effects not only on the health of a smoker but on the health of other people.
Traffic congestion: The more people that use cars on roads, the heavier the traffic congestion becomes.

2. Positive externality
Positive externality is a benefit from an economic activity experienced by an unrelated third party. Despite the benefits of economic activities that involve positive externalities, the externality also creates market inefficiencies. Positive externalities can also be distinguished as production and consumption externalities.

Positive production externalities include:

Infrastructure development: Building a subway station in a remote neighborhood may benefit real estate agents who transact properties in the area. Real estate prices would likely increase due to better accessibility, and the agents would be able to earn higher commissions.
R&D activities: A company that discovers a new technology as a result of research and development (R&D) activities creates benefits that help society as a whole.

Examples of positive consumption externalities are:

Individual education: The increased levels of an individual’s education can also raise economic productivity and reduce unemployment levels.
Vaccination: Benefits not only the person vaccinated but other people in the community because the probability of being infected decreases.

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