R.H. Coast writes The Problem of Social Cost, is an article examining the economic problem of externalities. The example of externality is a firm’s smoke imposed negative effects on neighbor properties. The standard economic analysis such of the economic situation is generally defined in differences terms of private and social good followed by the treatment of Pigou Economic Welfare. The standard economic analysis results in achieving most of the economists desires to hold firms responsible for the harmful that caused to injury by the firm’s smoke, or applies tax on the firm to equivalent the money term of damage that caused, or even excludes the firm from the residential area. Coast argues that such of an economic analysis is inappropriate because it incurs unnecessary results or desires.
The Reciprocal Nature of the problem
The traditional analysis obscure the nature choices to be made, avoid the harm to one party would conflict harm to another. The traditional analysis tends to miss out the key features of externality that is reciprocal nature. The reciprocal nature indicates that the externality is not simply result of one party’s action, but rather result of both parties’ combine actions. Similarly, either party can prevent the damage. For instance, Cattle damages crops of adjacent farmer, so cattle raiser can fence property or farmer leaves the land uncultivated. Economic optimal is maximize the joint value of outputs of both parties by comparing their marginal and total values. To decide what is valuable, the value of what is attained as well as the value of what is scarified to attain it. For instance, confectionery production imposed noisy and vibration to the doctor, which is affected the wor...
... middle of paper ...
... analysis focuses on damaging business decision and since the use of resources is not allowed for in costs, receipts are reduced by the same amount. Bur the value of social product has no social significance. Second, the tax should be equal to the damage done and therefore measure the amount of damage effects. However, tax equal to the damage it caused would tend to unduly high costs.
1. Externalities are reciprocal in nature.
Not only does the pollution cause an externality, but also the presence of the victims harms the polluter. If no one were harmed, there would be no problem.
2. Property right
3. Private product:
The value of additional product resulting from a particular activity of a business
4. Social product
Social product equal the private product minus the fall in the value of production elsewhere for which no compensation is paid by the business
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