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Externalities Case Study Essay Sample

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Externalities Case Study Essay Sample

Externalities are known as the third party or side effects which affect business decisions. Basically externalities occur externally or outside the market, those who are affected are not involved with the decision. These effects are created from production or consumption goods and services. Externalities are divided into two categories: Negative externalities and Positive externalities. Positive externalities are the benefits to third party of business activity which means the effects benefit the business. Negative externalities in contrast are the negative effects of business activity; these effects are unfavorable to the business or the business causes these effects.

Externalities have a huge impact on business development. Business development varies according to externalities. Positive externalities are most likely to benefit the business and increase development whereas negative externalities are more likely to contract business development or the business might encounter ethical issues depending on the externality.

A positive externality include new infrastructure, research and development, research in technology, education, health provisions, increased employment, to name a few.

New infrastructure will benefit the business and allow the business to grow and develop. Other positive externalities such as research and development will not only be useful to the business as they would gain more knowledge and understanding, the research could also be used for promoting the business. Advanced technology is one of the major influences of business development. Increase in technology will allow producers to be more efficient in producing. The effect of technology can help reduce the cost of producers and will reduce cost of production and cost of product/service, favoring consumers. Education is one of the major or the most important source of improving living standards. Education will improve productivity of labour. Training facilities provided to employees will improve productivity. As a result it will increase production of outputs within the amount of resources as employees will be much more efficient, this will also improve living standards throughout the economy, thus developing the business further. Health care provisions will reduce absenteeism and as a result frequency of workers being less sick/ill and unable to come to work would be less; hence the productivity would be more efficient and encourage development.

Where positive externalities help a business to grow, negative externalities cause setbacks. Negative externalities are the negative effects of business activity. Negative externalities include, smoke pollution, acid rain from power stations, air pollution from road usage, the social cost of drug abuse, the resulting damage on the environment caused by use of fertilizers in agriculture, external cost of building land in green belt areas (urban development), noise pollution often from taking off and landing of aircrafts and lastly external cost of people’s anti-social behavior. Other negative externalities such as out of town shopping centers, creates an impact on city centers rather than the whole economy.

These negative externalities affect business development; air pollution contributes to health effects, clean up cost and more importantly global warming. Noise pollution affects nearby residents, causes distraction and annoyance and has an impact on local house prices. With environmental damage it would be difficult to assign property rights and those creating the problem will have difficulty gaining compensation from people. Using up the environment means using up non-renewable resources. Noting that our resources are scarce, using up the environment will add onto the scarcity, which will cause the prices of goods and services to rise, therefore businesses will have difficulty pleasing consumers and the market is liable to inflation. Future generation should also be considered in this situation, as negative externalities affect future growth. The usages of many of these environmental resources are not even charged, such as overuse of waste facilities. Negative externalities could also dominate the positive externalities, such as anti-social behavior of people would cause inefficiency of labor productivity.

Therefore these externalities containing costs and benefits contribute to business development. As a result, in the competitive market, beneficial or inadequate goods might be produced and consumed.

As we have seen before, business development depends on externalities. How a business is affected by these externalities will be illustrated below by means of Bangladesh’s business development. Most production systems can be an aspect of both positive and negative externalities. Some of the positive externalities that Bangladesh has are its agriculture system. These agriculture systems are extremely efficient and can produce large amounts of food. These agricultural systems can also produce outputs which can be used for energy. But the processing of the output in Bangladesh uses more man-labor than technology. This reduces the cost, which is a positive aspect but the productivity and efficiency is deteriorated as less amount is being produced. But the agriculture system is capable of producing more than adequate amount of necessities, “Bangladesh grow over 21 million metric tons of food grains, basically rice and some wheat and potatoes which is enough to feed the population of the country, and for building reserve stocks”.


Due to our huge population, labour is incredibly cheap. Cheap labour is another positive externality which is a great advantage to Bangladesh. Cheap labour is an advantage to two aspects, it would cause products to be much cheaper, and the second aspect is there is no shortage in employees as the population is huge, although skill is required, but skills can be taught!

Bangladesh is known for its readymade garments, knitwear and etc. They obtain most of their foreign currency through ready made garments. They also export many other goods such as urea fertilizer, jute (which is Bangladesh’s’ leading products), leather goods and etc. This is a positive externality as Bangladesh has a good foreign trade relationship with other countries, which they can offer at higher prices compared to the lower prices they would have had to account if it were sold locally.

The negative externalities in this case seem to have outweighed the positive ones. Agriculture often has negative effects on the environment. The positive externality being cheap labor and the capability of producing large amounts of food from agriculture, contribute to the negative impacts on capital assets. These assets consist of natural resources such as soil and water and also the process of nutrient cycling and fixation, soil formation, biological control etc. These technologies used to improve productivity contribute to environmental damage and health problems. This raises conflicts about how efficiency of productivity and the subsequent of health problems and cost of environment can be equalized.

Other than the problems concerning agriculture, there are other negative externalities such as lack of efficiency of power and power itself. Power supply is unreliable in the country. Businesses come across problems with lack of electricity and power and therefore they need their own back-up power which increases cost. Specific negative externalities could be the unavailability of gas supply in certain parts of Bangladesh such as Bogra and Khulna, this limits the growth of gas-based industries and obliges them to use an alternative resource, and again this increases cost and efficiency of labor in competition with other industries.

Another negative externality is the strikes and blockades that are frequent in the country, whether aroused from rebelling against the government or the business. This highly affects the business as workers are unable to come to work, threatened by the resulting violence and blocking transport. As a result productivity is decreased.

Although, Bangladesh earns huge profit from exporting goods such as ready made garments and such, the factories contribute to environmental hazards, which is a huge negative externality.

Lastly, Bangladesh is relatively small for the large amount of population it restrains. Therefore as the economic growth increases, more buildings are being built, which not only contribute to environmental hazards but also to lack of space. As a result, the buildings are compiling up and are constricting. This causes increase in traffic and thus contribute to cost of time, for example, workers are likely to be late to work and therefore the productivity decreases, “time equals money”.

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