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Microeconomics - Essay Example

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Externalities occur in the market when third parties not involved in transactions between the parties buying and selling goods/services benefit or incur some costs following the transactions. Put in different words, externalities refer to situations when third parties to…
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Microeconomics
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Microeconomics

Download file to see previous pages... t comes about third parties suffer costs or financial consequences following market transactions between other parties involved in the purchase and sale of goods & services. For instance when organization involved in production or manufacture of goods for the market pollutes the environment through release of harmful gasses into the environment, the general public may suffer diseases translating into medical expenses not anticipated. The recent economic crises which resulted from the crash of the banking and mortgages markets translated into escalated prices with financial consequences to the general public. On the other hand a positive externality comes about when market transactions benefit third parties in a way. A good example is when a company invests in research & development which in the end benefits many other companies in the market.
In conclusion therefore externalities result into inefficiencies which may eventually lead to market failure i.e. private decisions which are based on the market fail to give efficient and desirable results in the perspective of general welfare. The government therefore intervenes to address the inefficiencies and adverse market effects resulting from the externalities. In cases of negative externalities the government can respond by imposing taxes to the involved parties which equal the amount of harm suffered by others. in response to positive externalities where where social gains exceed private gains, the government can also intervene by subsidizing those generating the social gains with amounts equivalent to what others ...Download file to see next pagesRead More
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