Economics Intervention and Externalities Essay example

Production, Consumption, and venture decisions of households, firms and individuals frequently affect others not involved in the actions. At times these indirect effects are minuscule. But when they are large they can become an issue—these are called externalities. Externalities are one of the major reasons governments intervene in the economic sphere. A positive externality is a benefit acquired by a third party due to an economic transaction. Whereas, a negative externality is a cost that is suffered by the third party. External costs lead to market failure. This essay will evaluate a measure imposed by the government in order to combat a negative externality. Since the start of January, Netherlands has increased the legal drinking age†¦show more content†¦Actions like drunkenness in a public place and drink-driving are often defined as criminal by law which regulate drug use. These types of crimes generate social costs, through damage to property and individuals an d also through subsequent costs to the public purse for transport management, policing, justice and corrections. Another cost faced is the pain, suffering and violence experienced by those close to the drinker. Alcohol consumption leads to motor vehicle accidents, damage to the cars and property. The government suffers the cost of law enforcement, prevention and administrating the insurance system (Easton). Drinking alcohol results in a reduced workforce as a consequence of death or premature retirement and absence due to injury or sickness. The most significant sectors that get affected by the consumption of alcohol would be the health system, at every level from prevention to higher tertiary spheres to nursing care later on, the social security or other forms of public income maintenance, traffic management, and also to policing, justice and corrections. There are probable gains from the specific tax imposed on the alcoholic beverages, but these levies do not cover the costs that are incurred from the consumption of alcohol. HOW WILL THE MEASURE HELP It was believed that the legal drinking age in the Netherlands should be raised from 16 to 18 as at the latter age people tend to become more mature and responsible. Strict alcohol control policies will tendShow MoreRelatedCaose Theorem1164 Words   |  5 PagesSUBMISSION QUESTION 7 EXTERNALITIES AND COASE THEOREM (a) Explain what is meant by â€Å"externalities†? (b) Consider an industry whose production process emit a gaseous pollutant into the atmosphere. Use the simple supply and demand model to demonstrate that, in the absence of any regulation, this industry’s production will result in allocative inefficiency in the use of society’s resources. 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