Negative Externality  

by | Aug 21, 2016

Can the use of private vehicles to commute harm anyone? Let’s do an acid test on this question with an example.

Miss. Shanti has a scooter and the distance from her place to the market, college and her  office are 1 km, 8 km and 6 km, respectively.  She can get public transport easily to commute to these places. She is also very kind, humble and sensitive. She has some social responsibility sense and also takes care of her habits not to harm environment and society.

Now what is the economic benefit she is adding by using a scooter? When she uses public transport it takes her 60 mins to commute and when she uses scooter it takes 25 mins. So by using scooter, travel time is reduced by 35 mins.  In 35 mins she completes 10 work files at her office. Her work adds economic value for her office and to herself. The final product scooter is also adding economic value to the workers, factory and other people who are engaged in its manufacture. This all also adds to the GDP of country.

But now where is negative externality in this example, let’s check. When the raw materials such as iron, plastic, and rubber are extracted, it exploits the site of extraction. The factories where processing is done to make final product adds economic value to the nation, workers and other people associated but at the same time it pollutes air, water and also make noise pollution. Similarly when Miss Shanti uses the scooter, she also pollutes the air and creates noise pollution which can be avoided by using public transport but which will in turn be time consuming, which somehow reduces other economic value. Pollution leads to many diseases and environmental imbalance which will affect our life adversely.

Thus the concept of negative externality is the cost that is suffered by a third party as a result of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and include any individual, organisation, property owner, or resource that is indirectly affected.

*At the Induction Training, the cohort decided to study the concept of Negative Externality. Bhumika simplifies it further for the non economists in the house.

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  1. Anupama Pain

    Simple, crisp, non judgemental and gives both sides of the decision … well articulated. Good job! Looking forward to more such reads.

  2. Swati Saxena

    Brilliantly explained Bhumika. Now I know who is the go-to person for simplifying complex concepts.


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