UNIT

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 byproduct 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.

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