NATURAL ENVIRONMENT & BUSINESS UNIT - 15 NATURAL ENVIRONMENT & BUSINESS

Externalities: This is also known as Spillover Effects or Neighborhood Effect. Externalities are common in virtually every area of economic activity. They are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. 

For example: - a chemical factory emits wastage as a by-product into nearby rivers and into the atmosphere. This creates negative externalities which impose higher social costs on other firms and consumers. e.g. clean up costs and health costs.  For example: - An individual planting an attractive garden in front of his or her house may provide benefits to others living in the area, and even financial benefits in the form of increased property values for all property owners. Education creates a positive externality because more educated people are less likely to engage in violent crime, which makes everyone in the community, even people who are not well educated, better off.

Positive externality in consumption (Education) Negative externality in consumption (Teenage rider, Smokers) Positive externality in production (Beekeepers) Negative externality in production (wastage of industries)

Environment Degradation: Environmental degradation is the deterioration of the environment through depletion of resources such as air, water and soil; the destruction of ecosystems and the extinction of wildlife. Environmental damages are of following category ; Water pollution Air pollution Soil pollution Deforestation Solid and hazardous wastes

Internalizing Externalities: Government taxes and subsidies If MSC>MPC & MSB<MPB = taxes should be imposed. If MSC<MPC & MSB>MPB = subsidies should be given. Direct government regulations Introduction of emission standards Prescribing emission fees Introduction of liability rules Defining property rights Negotiation and the coase theorem

The Global Environmental Threat: Climate change Global warming or green house effect Acid rain Ozone layer depletion Nuclear accidents and holocaust.