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Jason Alves May 4, 2015 Economics 102 Externalities In our economy, the government is always trying to improve the allocation of resources; one of the methods that improve the allocation of resources in our economy is the alteration of market failures that are caused by externalities. Externalities occur when an external source receives some of the costs of benefits of a certain good that the actual buyer or seller does not receive. There are two sides to externalities; there are both negative and positive externalities. First of all, a negative externality occurs when a decision made from a source (Individual or firm) does not have to pay the full amount of their decision. When talking about a good or a service that has a…show more content…
Since the government in England intervened with smoking in public places, the first year of this law showed a 12% decrease of children admitted to the hospital because of asthma. In addition, the government may rectify the inefficiencies resulting from negative externalities of smoking by banning smoking completely. In doing so, the effects of smoking reduce dramatically as well as the admitted children with asthma to the hospital. However, if these laws were passed there would be many altercations in the long run. For example, the revenue made from selling the cigarettes would be all lost from the government, resulting in a less popular vote from the people. With the government extinguishing the cigarettes from the market, a black market would rise of cigarettes because of the inelastic demand for them. The end result in my opinion would be a partial ban of the smoking, with places set up by the government so you may enjoy your cigarette without being a negative externality. This way the children’s asthma is under control, the direct control from the government is obeyed and the people get to have their cigarettes. Although direct control would be the better option in my opinion, specific taxes on negative externalities may also work. For this the government may levy taxes or charges on the goods produced by the externalities. Negative externalities or spillover cost are troublesome in our economy but there are five ways

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