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Assignment: Externality

[Name of Writer]
[Name of Institute]

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Introduction ............................................................................................................................................. 3 Formatted: Centered
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Positive Externality ............................................................................................................................. 4
Negative Externality ............................................................................................................................ 5
Dog Ownership In Terms Of Externality ................................................................................................. 5
How Do Dogs Effect Positive Externality? .............................................................................................. 6
Pets at Workplace .................................................................................................................................... 7
Encouraging Dogs at Homes through Flexible Government Policies ........................................................ 7
Conclusion ............................................................................................................................................ 10
References............................................................................................................................................. 13
Introduction ..................................................................................................................................... 3
Positive Externality ..................................................................................................................... 4
Negative Externality.................................................................................................................... 5
Dog Ownership In Terms Of Externality........................................................................................ 5
How Do Dogs Effect Positive Externality? .................................................................................... 6
Pets at Workplace ........................................................................................................................... 7
Encouraging Dogs at Homes through Flexible Government Policies ............................................ 7
Conclusion .................................................................................................................................... 10
References ..................................................................................................................................... 13
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Introduction

The marketing of a product depends on the cost vs. benefits incurred by the producer and

the consumer, the primary components of an economy that are directly affected by market

failures and successes. HoweverThese prices paid by the producers and consumers should

balance each other in order to have a successful market product. The producers rely on the

consumer demand in order to launch a widely acceptable and cost saving product into the

market. This would mean that the market failures have to be minimal for a successful bargain.

Yet, there are third parties not directly involved in the activities of a marketing product that

receive the benefit or incur cost by spillover. These unintended spillover effects are known as

economic externalities costs by the economists and can be negative or positive in its outcome. To

give an example, a neighbor who buys a lactating goat that makes noise all night when you have

an exam the next day has a negative spillover effect or externality, whereas, ifof a market

bargain. As stated by Caplan (2003) that same goats milk is made free for all neighbors to

utilize, it has a positive spillover effect or a positive externality.externalities aids in undermining

the social effects of individual selfishness. Thus, these spillover effects are not reflected in the

market prices of the product as set by the producer, and are neither paid for by the consumer

(Mankiw, 2016).

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The best party for the reception of the positive effects with the third party benefitting

from a transaction in the market, without incurring any cost, is the government. Externalities

allow the government to curtail or promote a business, according to the external effects produced

by it. This essay intends to use the example of dog ownership to explain, how the positive health

benefits of dog ownership allow the government of Australia to promote this business within the

community and curtail it, where necessary. These long term benefits and spillovers, also allow

governments to privatize certain business sectors, and also allow them to keep other sectors

strictly under government control.

The Externalities, as defined by economists, can be positive or negative externalities.

Positive Externality

In economics, the positive externality is when a third party, not involved in the

transactions between a buyer and a seller, benefits from the side effects of those transactions, and

a negative externality is where a non involvednoninvolved party incurs a cost as a result of these

transactions (Batabyal, and Nijkamp, 2014). The third party, in such a case, is not compensated

for the loss, whereas, in case of a positive externality, the third party benefits without having to

pay for it. In any case, externalities exist where market failures occur.

In long term, with the government taking advantage of these market failures, and

converting them into mass third party benefits, The effects in this case are greater than initially

assumed by the producer, and override the cost of production. Therefore, in the long term, the

benefits that a third party enjoys are greater as a whole, than those enjoyed individually by a

buyer or a seller, as a result of transaction between the two.. For example, privatization of

organizations gives them incentive to enjoy the property rights, and in return, results in better

productivity and employment. Education and training and investing intoin newer technologies

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are other examples of investment that reap third party benefits in terms of cost effectiveness,

better productivity, enhanced quality of products, safer production techniques and overall

improved economical outcomes (Batabyal, and Nijkamp, 2014).

Negative Externality

Negative externalities take place as a result of organizations and individuals participating

in activities that are hazardous to the environment or other individuals (Whitcomb, 1972). One of

the examples include use of weapons of mass destruction during wars that impact the levels of

pollution and is hazardous to health of third parties, not directly involved in the war. The

negative externalities need to be controlled by the government by use of penalties and

punishments, or taxes, in the case of governments (Roy, 1997). Many states apply restrictions to

use of property and animal and human rights in order to control these negative external effects

that can cause large negative effects.

In case, a government fails to subsidize a national third party benefit, or regularizing a

negative impact towards a third party, this can result in government failures. Applying or

reducing tax on properties, and investing national goods, like clean water, pollution free air, the

growth of trees and use of fossil fuels, energy saving and solar power plants, can go a long way

in turning negative externalities into positive outcomes

Dog Ownership In Terms Of Externality Formatted: Font: Not Bold

It has been proved through different studies that dog ownership can have a positive effect

on the health of families, in particular children. This can have positive externality in a society

whereIn turn, lesser expenditure is done on healthcare by enhancing and encouraging the pet

ownership of dogs by pet buyersparties involved. It has been estimated that approximately 3.86

billion dollars are saved per annum in healthcare due to pet ownership by the general population.

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How Do Dogs Effect Positive Externality? Formatted: Font: Not Bold

Pets, and in particular dogs, are found to have both physical, as well as psychological

health benefits onof the society. Dog owners have been found have higher immunity, lesser rates

of infections, better allergic response, higher self-esteem and better peer relationships with an

empathetic outlook on life than those with no pets (Mankiw, 2016). Even other pet owners have

a less profound effect on their overall health than the owners of dogs. Another,A documented

health benefit of having a dog asfor a pet is that dogs are found to encourage exercise and

activity. Approximately 55 minutes more of physical activity per day was reported by dog

owners. They are fond of outdoors and games and thus can be mood boosters and stabilizers.

Thus, they contribute towards reducing depression, anxiety and have a positive overall effect

oncan improve the psychological health of their owners. Approximately 93% of dog owners

were found to be more satisfied with their lives, and were better at coping stress related events,

and found a companion in their dogs (Mankiw, 2016). Even widows were found to be

havehaving better, the children and teenagers specifically benefit more satisfying lives from

owning a dog as it reducesby reducing their loneliness and restlessness, and are a boredom

therapy for them causing them to have a more positive outlook on life, and lesslesser chances of

drug addiction and depressive thoughts (Roy, 1997). They are also great companions of solitude

and illness, and conversation starters, thus aptly called a mans best friend. The dog owners

were found to find it 74.5% easier to communicate and interact with other people as compared to

62.6 % of non-dog owners (Mankiw, 2016). The consolidated effect of thus, having a dog can

lower triglyceride and bad cholesterol of LDL cholesterol levels, increase the good HDL

cholesterol levels and thus improve cardiovascular health of its owner. Dog owners have been

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reported to have less chances of a heart attack in 12 months following loss of a partner than non-

dog owners. Same are the health benefits to widows following the loss of their husbands.

Pets at Workplace Formatted: Font: Not Bold

Dogs, by their virtue of being friendly, and lowering the levels of stress, are found to be

value in improving the quality of work, lower workplace stress levels, creating better interactions

between colleagues (Yannelis, 2001). They can also act as incentive or lowerby lowering down

the anxiety levels associated with employees having to do overtime. Therefore, on an individual

basis, certain companies allow flexible policies for employees to keep pets. They must keep in

view the environment friendly rules and regulations and cleanliness in view before allowing pet

friendly policies.

Encouraging Dogs at Homes through Flexible Government Policies

Having considered the above mass benefits, the positive externalities caused by keeping

dogs as pets need to be turned in favor of the society by the governments need to comply by

employing dog/ pet friendly policies. Australia is considered to be one of the most pet friendly

countries in the world, with over 76% households containing pets.

The government can use this to increase the positive externality of keeping dogs. The

following are a few policies that can be applied by the government in order to encourage people

to keep pets.

The policies should be made consumer friendly for buying and sale of dogs.

Vet insurance should cover healthcare including vaccinations and regular per annum cost

of OPD visits.

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Strata buildings can be asked to provide pet friendly policies. In order to maintain the

event free pet keeping and decreased complaints from neighbors, and maintain

cleanliness, builders and property owners should ask pet owners to show a pet resume,

stating the pets vaccination status, de-sexing certificate, reference from past landlords

regarding the pets overall behavior and insurance policy number.

Governments can regulate taxes on import of pets from other states as well.

The Australian government has taken some measures in this regard, which allow easier

import formfrom certain states like the New Zealand, the Coco (Keeling) islands etc. whereas,

health friendly policies are applied for import formfrom other states that are at risk of

transmitting hazardous infections toin Australia (HO, ZENG and ZHANG, 2007).

Another policy that has been applied makes it relatively easier to import certain breeds of

animals, whereas, restricting others. For e.g., the Asian Leopard cat bred with Bengali cat

species, should have the imported species at least five generations removed from the Asian

Leopard cat.

These overall measures, not only increase the positive externality of keeping dogs for pets,

but also go a long way incontribute by decreasing the negative spillover effects of keeping

infected, unhealthy or unclean animals that might affect the neighborhood, and turn into loss of

revenues by the government.

MC
Cost

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MC
Cost

C2

Reduction
C1 in
Deadweight
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Q1 Q2
Benefit from Dogs Ownership

As observed from the graph above, by increasing the ownership of dogs from Q1 to Q2,

we can thereby decrease the overall cost borne by the government andby the

consumersproducers in terms of healthcarehealth care. The net effect of this consumer/buyer

relationship in the mean can cause a net reduction in dead weight borne by all third parties

concerned. This is a classic example of a positive externality as already been discussed above in

detailbetween these two points. The chance of market failure is decreased henceforth.

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Thereby, the current applied policies, as well the recommendations given up, can all sum

up to reduce the negative effects of pet ownership by enhancing environment friendly, healthy,

clean and safe keeping of pets at home. And byBy encouraging the pet ownership of dogs, the

benefits are maximized in terms of better monetary returns and savings by positivein health

benefits, reducing the overall cost of healthcare both physically and psychologically. Better
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psychological health would in turn lead to acare, better productivity and quality. Individuals can

contribute to the growth of industries more positively when both physically and psychologically

healthy.fit for participation. Reduction of mental stress and improved and enhanced coping

mechanisms of individuals can mean increased yield by improving efficiency at work and at

home, maintaining a balance that has a positive external result on the community as a whole.

This would in turn lead to successfulboth less government and stability in the long term.

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market failures.

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References

Batabyal, Amitrajeet A., and Peter Nijkamp. "Positive And Negative Externalities In Innovation,
Trade, And Regional Economic Growth". Geographical Analysis 46.1 (2014): 1-17.
Web.

Caplan B. The Logic of Collective Belief. Rationality and Society 15: 218-242, 2003.

HO W, ZENG J, ZHANG J. Inflation Taxation and Welfare with Externalities and Leisure.
Journal of Money, Credit and Banking 39: 105-131, 2007.

Mankiw N. On welfare economics in the principles course. The Journal of Economic Education
48: 27-28, 2016.

Roy U. Economic Growth with Negative Externalities in Innovation. Journal of

Macroeconomics 19: 155-173, 1997.

Whitcomb D. Externalities and welfare. 1st ed. New York [etc.]: Columbia University Press,
1972.

Yannelis D. On the simple welfare economics of network externalities. International Journal of

Social Economics 28: 344-348, 2001.

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