Externalities and Government Intervention: Prices Do Not Capture All Costs

Technology has advantages like the increase in production with a smaller cost for the company. However, technology also replaces men in labor, producing unemployment. Every day, the world faces more research activity, and the technological development grows constantly offering new and more effective methods of production. With the time, technology has become indispensable for some firms, which line of production would be dramatically hindered without technology.

This situation lets us think of technology as an externality in the market. That is, the introduction of new machinery to a company, with the purpose of increasing the production, using less time, and lowering costs, seems like the perfect move to obtain a successful development. However, why do we speak about an externality? Technology spill-over has more effects than only an increase in production with lower costs. It has collateral effects, and therefore, it’s called externality. Some of the most important consequences of technological advancement may be the displacement of the manufacturing work force, the creation of widespread unemployment, social disruption and human hardship. After looking at these aspects, technology development doesn’t look as convenient as before.

Having notion of the aspects above, we can start a research about technology advancement, which has been recently analyzed by a lot of economists. The purpose of this essay is to try to determine the real effect of technology over the market, and its consequences regarding employment, wages, social costs, government intervention, and companies’ developments.

Technology as a Positive Externality

When we speak of technology as a positive externality, it means that it actually benefits the by...

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...nce, can avoid producing so much pollution by developing a certain technology. However, for the firm it is the same to produce or not certain amount of pollution. Therefore, with the contract imposed by the government, this condition is established: if the firm respects the pollution production standards, it not only keeps the government approval to keep on functioning, but gets an extra profit given by the state, for respecting the contract.

I personally believe that government intervention is remarkably vital for externalities regulations. Unfortunately, firms are not always aware (in the case of pollution) of the damage they are causing to the environment, and they don’t do anything about it because the economic income won’t vary at all. The government must therefore, impose incentives to regulate the externalities, and control these very delicate aspects.