Negative externalities happen when an economic exploit has a negative impact on an unrelated third party. In such economic activity, the consumer and the producers are the transacting parties. A third party is another entity that was not part of the transaction but is negatively affected by its outcome. The reverse is true of a positive externality ( Saez, 2010). A third party not part of the transaction between a producer and a consumer is impacted in a positive way by the transaction.
When there is a construction of mass transit systems and new roads, property value along those routes hikes a great deal. The owners of those properties are the third party who benefits in a transaction they were not involved in. Such is an example of a positive externality. The mass transit systems can also as negative externality. Trains plying that route rumble, cause vibration, and noise pollution. The residents along that route are suffering the consequences of other people’s developments.
Delegate your assignment to our experts and they will do the rest.
Externalities can be solved to achieve market efficiency through the Couse theorem ( Saez, 2010). There should exist costless bargaining and well-defined property rights. Ideally, negotiations between the transacting party and the third party that is being negatively affected by the externality can bring the socially optimal market quantity. In this case, negotiations would be between owners of the mass transit system and the residents along the route. If the owners of the mass transit system ignore the residents, the negative effects are likely to get worse.
Government intervention to correct negative externalities is justified. When a party is affected negatively by the actions of another party who is reaping benefits from economic activity and fails to compensate the aggrieved party, then the government is right to intervene with externalities to affect market efficiency.
References
Saez, E. (2010) Externalities: Problems and Solutions. Chapter 5. Public Finance and Public
Policy. https://eml.berkeley.edu/~saez/course131/externalities1_ch05.pdf
