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Sunday, February 17, 2013
Information externalities are many and are part of government
policies. To discourage certain products or services that are deemed harmful,
governments usually impose taxes such as happened in Canada when that government imposed
a federal tax on automobile air conditioners that are cause for fuel
consumption (Mikesell, 2011). This federal taxation on automobile pollution is
not meant to raise the quality of roadways or embark on new road constructions,
but to discourage automobile use by drivers. Externalities usually affect third
parties and have been found to have an effect on social and market systems and
are well recognized in market research and macro-marketing (Mundt &
Houston, 2010). One example of externality is market failure especially when
private costs or benefits show difference in social costs or benefits.
Polluting factories cause harm to the environment and to humans
inhabiting the surroundings. Thus, if the polluting industrial complex and the
residents living the area fail to raise awareness and refuse to pay for the
harm caused by the pollution, it becomes an externality. Externalities can
either be positive or negative. An example of a positive externality is when a
section of society is inoculated against disease such that they are assured of
not contracting the disease and as well not infect those who have not been
inoculated (Hyman, 2011). An example of a negative externality is the
production of paper that may have negative effects on the environment as waste
from the production facility may pollute surrounding streams and rivers.
The beginning of 1999 created the explosive dotcom (.com) age.
According toBenveniste, jungqvist, Wilhelm, and Yu (2001),
it is difficult for pioneering innovators to take the lead in information
dissemination as their prospects are diminished by information externalities.
Despite dotcom pioneering innovators reigning in the market economy during the
initial years of their inception, a tremendous takeover ensued where
intermediaries took the mantle of information externality. The ushering of the
dotcom age opened many avenues for individuals, nations, societies, and the
world at large. What started as a small innovation has benefited entire
humanity. Two nations may form a bilateral organization to look into their
internal affairs. However, other nations may jump on the bandwagon after seeing
the benefit of the newly-founded organization. The transfer of information may
impact others negatively or positively.
Information externalities are widespread in the banking and in the
mortgage marketing industry. Bankers may only lend money to borrowers they have
information about. Someone having poor credit rating may be denied a bank loan
or mortgage loan. According to Nakamura (1993), evidence has been found that
banks are more likely to turn down loan payments during downturns and they are
also more likely to raise their lending requirements when there is a crunch in
As it has been always, there seem to be a form of interaction
between economic behavior and information. When there are variations in
information, what comes to light is information asymmetry. The person borrowing
a loan is more informed about his or her business arrangements than the banker
who is loaning him or her, the money, to continue conducting business, while
the banker tends to have considerable knowledge of his business arrangements
than the one borrowing. The discovery of oil in Uganda
in 2006 created competition for oil exploration in several countries in East Africa and the Horn of Africa. Oil was discovered in
the Ogaden region in Ethiopia;
exploration began in Kenya
respectively. This succession of oil discoveries and oil exploration is
Other than contractual rights given to overseas-based engineering
firms mainly hailing from the Western Hemisphere and Asia,
by far no oil has been extracted from the aforementioned countries. If oil is
extracted and overproduction or excessive distribution is not controlled, there
could be a negative externality. The government will then be compelled to
impose Pigovian permits and taxes to overcome environmental degradation and
pollution. While the government compels companies to purchase pollution
permits, it is the taxpayer that shoulders the costs of pollution. There is
better government for everyone when society is educated and voter education is
widespread. When markets produce less than society can consume, there is a positive
externality. A government can take remedial measures to overcome externality
problems by internalizing the externality. The government may tax goods having
negative externalities and subsidize goods showing positive externalities.
The government usually imposes hefty taxes on gasoline mainly
because of such problems as pollution, congestion, and accidents. Such action
by the government may lead to reduced accidents, less pollution, and controlled
congestion. Corrective taxes and pollution have many things in common. Firms
buy pollution permits while the same firms pay corrective taxes. Some private
solutions to externalities include charities like Sierra Club whose main goal
is to protect the environment. Another form of private solution to
externalities is when colleges and universities receive payments from alumni,
foundations, and corporations (Mankiw, 2009).
Two farmers are neighbors; one grows apples and the other is a
beekeeper. The bees pollinate the apple trees so they can grow nutritious
apples and produce a bumper harvest. On the other hand, the bees get nectar
from the apple trees so they can produce the honey you eat at home and at work.
Syrups that help you recuperate when you get sick are made from honey. The two
farmers may at times think negatively, with the apple farmer deciding on how
many trees to grow and the beekeeper deciding on how many bees to keep. This
form of thinking produces negative externality. As a result of the negative
thinking, the bee keeper decides to keep few bees and the apple farmer
concludes to keep too few trees. Such externalities could be internalized if
the beekeeper bought the apple orchard and the apple farmer bought the
beehives. What remains is one firm that can be internally externalized. That is
why, in modern times, firms are involved in different types of business.
Positive and negative externalities are many. The barking dog of a
neighbor poses a negative externality because of the nuisance from the
uncontrolled noise. It is the responsibility of the dog owner and the local
government to intervene and do something about the negative behavior of the
barking dog. Restoring old historic buildings tend to have positive
externalities when restored for people to enjoy and take rides. Because people
don’t see the significance of old buildings, at times these buildings are left
to waste. One way of overcoming this problem is for the local government to
give tax breaks to owners of old historical buildings so they can be restored and
put to effective use (Mankiw, 2009). Anything having adverse reaction to a
bystander becomes a negative externality. An example of a negative externality
is fumes released into the air by automobile exhausts. It is a negative
externality because bystanders are affected by the smog that is released into
the air consequently leading to atmospheric pollution. When a new research in
technology is undertaken, it leads to positive externality because many people
will benefit from the positive knowledge and results of the research (Mankiw,
Big companies or conglomerations exploiting natural gas and oil at
times give misleading information. Thus, it is crucial governments revise how
information is exploited by corporations engaged in natural resource explorations.
When Bed, Bath, & Beyond moved into New York’s Sixth District in 1992, many
other fashion designers followed suit to make use of the booming economy (Caplin
& Leahy, 1998). That is also information externality.
Benveniste, L.M., Ljungqvist, A.P., Wilhelm,
W.J. & Yu, X. (2001). Evidence of information spillovers in the production
of investment banking services. Retrieved from http://archive.nyu.edu/bitstream/2451/26535/2/FIN-01-006.pdf
Caplin, A. & Leahy, J. (1998). Miracle in Sixth District Avenue:
Information externalities and search. The
Economic Journal, (108), 60-74.
Hyman, D.N. (2011). Public finance: A contemporary application of theory to policy (10th
ed.). Mason, OH: South-Western, Cengage Learning.
Mikesell, J.L. (2011). Fiscal administration: Analysis and applications for the public sector.
South-Western, Cengage Learning.
Mundt, J. & Houston, F.S. (2010).
Ubiquitous externalities: Characteristics, climate, and implications for
post-acquisition behaviors.Journal of Macro-marketing, 30 (3), 254-269 DOI:
Nakamura, L.I (1993). Information
externalities: Why lending may sometimes need a jump start. Business Review.
Retrieved from http://www.phil.frb.org/research-and-data/publications/business-review/1993/brjf93ln.pdf