Public Financial Administration and Management (PUB3705)
Essay
Marked Ass(70%)CONCEPTS OF EXTERNALITIES
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Public Financial Administration and Management (PUB3705)
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University Of South Africa (Unisa)
This essay delves into the concept of externalities, identifies different types, and discusses their importance to public managers, emphasizing how understanding externalities is crucial for effective policy-making and resource allocation.
Public Financial Administration and Management (PUB3705)
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INTRODUCTION
Externalities are regarded as one of the most crucial economic concepts that a
public manager must comprehend since they have an impact on society as a whole.
In this essay I will define the concept of externalities, identity different types of
externalities and discuss the importance of externalities to the public manager.
1.CONCEPTS OF EXTERNALITIES
Pauw, Linde, Fourie and Visser (2015:28) define the concept of externalities as the
effects of a transaction on parties that are not involved in the agreement and, as a
result, were not charged a fee. Externalities are actions that a company or person
makes that have repercussions or impacts on other people. According to Cullis and
Jones (2009:38) externality are said to be present when an individual's utility
depends on both the actions of other people and the commodities and services they
acquire and consume. Externalities happen when producers or consumers don't pay
the full price for an activity's expenses and benefits (The Greater London Authority
2006:10). More specifically, externalities occur when one agent's behaviour impacts
a cost or benefit on another agent, but that agent is not charged or compensated for
it. Externalities occur when there is a disparity between the private costs/benefits of
an activity faced by society as a whole. Externalities can have either positive or
negative consequences on society, depending on their impact.
2.TYPES OF EXTERNALITIES
2.1. Positive externalities
Positive externalities occur when an activity imposes an external benefit and there is
insufficient activity to retain all of the advantages,
causing individuals to underinvest
in the activity (The Greater London Authority 2006:11). For example, if a farmer
employs a team of workers to remove a pest plant on her riverbank farm, other
farmers downstream gain from the contract since the spread of the plant is limited,
and they save money on their labour bill as a result (Pauw et al 2015:29). Another
example is an investment in renovating a dilapidated terrace house, which may have
extra positive effects on the saleable value of other terrace houses (The Greater
London Authority 2006 :11). A positive production externality example is Beehives of
honey producers have a positive impact on pollination and agricultural output. A
positive consumption externality occurs when an individual's consumption improves
the well-being of others, but the individual is not compensated by those others, such
as a beautiful private garden that passers-by enjoy seeing.
Clift et al(2010:48) explained one example of positive externalities as fellows “
research and development ( R&D) activities are widely considered to have positive
effects beyond those enjoyed by the producer-typically, the company that finds the
research, because R&D adds to the general body of knowledge, which contributes to
other discoveries and development “. Some positive externalities have advantages
that go beyond the people who pay for the activity, much like public goods.
, 2,2. Negative externalities
The Greater London Authority (2006:10) state that the negative externalities are
situations in which an activity results in external costs for others. In these situations,
there will be an excess of the activity since individuals do not bear the full costs,
leading to an excess of the activity. An example of this is when industrial production
pollutes a river, harming anglers and water companies in the process. As a result,
the industrial company may decide to increase production without taking into account
the effects on fish stocks, the enjoyment of local anglers, or the increased costs for
water treatment (The Greater London Authority 2006:10). Pauw et al (2015:29)
mention a negative externalities as follows " A cafe owner sells a packet of high tar
cigarettes to a customer, the customer smokes the cigarettes in the presence of his
mother -in-law as they travel down to the coast for a holiday and her health was
affected, which forced her to consult a doctor in the resort town and paid the doctor's
fees and was booked into the local provincial hospital and there were public costs
involved in that". My own personal experience was when my neighbour played loud
music on a daily basis, which caused me and my family to wake up whenever he
played the music and resulted to lose of sleep, which then lead to health issues for
my younger sibling.
3. IMPORTANCE OF EXTERNALITIES TO PUBLIC MANAGERS
Externalities are important for public managers to understand since they are
accountable for making decisions that affect society as a whole. It enables them to
measure the societal costs and benefits of various policies and activities, as well as
ensure effective allocation. Externalities offer severe problems for economic policy
when people, households, and businesses fail to internalize the indirect costs or
benefits of their economic transactions (Clift et al 2010:49). Market results are
inefficient because of the gaps that exist between social and private costs or profits.
In some circumstances, they may stifle market development. Although market-based
corrective actions are a possibility, public managers are frequently required to
intervene to ensure that benefits and costs are adequately internalized (Clift el al
2010:49). Internalized costs and benefits that are not measured frequently provide
subpar performance. Because public managers are in charge of making policy
decisions, it is critical that they understand the concept of externalities.
Externalities have an impact on resource allocation because the market fails to fully
price the external consequences of particular economic activities. This is because
market pricing frequently reflects the cost sellers charge customers for a good, a
price based on the personal value derived, and ignores third-party costs or benefits.
Because public managers are critical in resource allocation and management, they
ensure that public resources are used effectively, hence improving overall welfare.
CONCLUSION
The essay examined the notion of externalities, described distinct types of
externalities, and explained the importance of externalities to public managers.
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