External Effects Description:

The economists keep telling us that we are all living in a world that is full of scarcity. They say we have limited resources in all areas. They say that the cost involved in using them in one particular way is that which cannot be used in another way. But there are few exceptions to this too.

Take the case of salt. It is so abundant in the case, that it can be used on and on for many more years to come. There is no scarcity for ice in places like Greenland. Air is the best free resource tat nature can give us. Without it, nobody can survive on this earth too.

In some cases, they appear to be free when they are scarce in nature. When the resources that are scarce are free in nature, people tend to ignore the consequences that would be faced. There is some part of their actions that becomes ‘external’ in this case when they are taking decisions regarding these scarce goods.


The Externalities

This is something which can be positive or negative.

  • In the case of positive externalities, there are other results attached to the decision, by which there is a benefit to the other people too. A good example her is the public goods.
  • In the case of the negative externalities, there are other results or by-products that are attached to the decision. But these are harmful to the others. There is no benefit happening to the rest of the people.
  • The issues of pollution can be taken as a good example in the case of the negative externalities.

These things happen because of the faulty calculations. This happens in the case of the costs and the benefits, and they are most inefficient economically.


The Two Efficiency Problems

When the resources are scarce, two problems can come up win case of the resources being free. These two problems are:

The production is lesser than it can actually be. More can be produced if there was a different pattern being used in case of the resource usage.

The economy produces a point inside the production possibility frontier in case the resources are used properly.

There is also the chance of the secondary efficiency problem that can be seen to arise out of this. If the calculations are done right, there would be no issues. But that would be highly impossible in scarce goods.


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