Sample Essay On Externality
My hometown has a fresh water lake that has plenty of fish. The lake is not big, but it is big enough to harbor enough fish for the whole town. Due to the presence of the lake in the small town, many people in the town including myself know how to fish. Some of the times, we have fished for more than is enough to be sold just in our hometown. The price of fish in the neighboring town is quite high as compared to our town. We therefore, do our fishing and sell the fish in other towns. The result has been that the residents of our town no longer enjoy the benefits that come along with having the lake around.
The actions have resulted into a negative externality because it deprives the residents the benefit that they initially had of consuming fish from what is considered community lake. They have had to go for months without fish when fishing has been done to an extent that only small fishes remain and have to be given time to grow. Some people use smaller nets to extract the small fishes. The externality caused here cannot be accounted for by a market transaction since we will always want more money that the market cannot provide.
The government can, however, intervene to create a socially optimal outcome that can become market equilibrium. The government can regulate the limit of fishing on a daily basis or a seasonal basis. It can set the maximum quantity of fish that can be removed from the lake within a specified period. It can also ban the use of small nets in fishing to ensure that the small fishes are not removed from the lake. In addition, the government can also set the quantity of fish that must be sold to the local markets at reasonable prices. Failure to comply with government regulations should be countered with heavy fines that will deter fishers from violating the laws. Given that an intervention by the government will benefit the local community economically and also health wise because of the nutritional benefits of eating fish, it is worth government’s involvement.