Sunday, February 17, 2013

Information Externalities

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.
Information Externality
The beginning of 1999 created the explosive dotcom (.com) age. According to Benveniste, 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 the market.
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 and Somalia respectively. This succession of oil discoveries and oil exploration is information externality.
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, 2009).
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
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.
Mankiw, N.G. (2009). Principles of Macroeconomics. Mason, OH: South-Western, Cengage Learning.
Mikesell, J.L. (2011). Fiscal administration: Analysis and applications for the public sector. Boston, MA: 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: 10.1177/0276146710372223.
Nakamura, L.I (1993). Information externalities: Why lending may sometimes need a jump start. Business Review. Retrieved from

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