Corrective Subsidy Report (DONE).docx - FACULTY OF BUSINESS AND MANAGEMENT COURSE PUBLIC FINANCE(ECO 648 TITLE INTERNALIZATION OF EXTERNALITIES

Corrective Subsidy Report (DONE).docx - FACULTY OF BUSINESS...

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FACULTY OF BUSINESS AND MANAGEMENT COURSE: PUBLIC FINANCE (ECO 648) TITLE: INTERNALIZATION OF EXTERNALITIES: CORRECTIVE SUBSIDY PREPARED FOR: ASSOCIATE PROFESSOR ZAHARIAH MOHD ZAIN PREPARED BY: ‘AZIM MUZAKKIR BIN IBRAHIM (2017577303) AHMAD SUFIAN BIN SHAMSUL ANWAR (2017354579) ERNEE NATASYA BINTI MOHD SULEIMAN ( 2017343761) GROUP: BA2505A SUBMISSION DATE: 13 TH APRIL 2020 0
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TABLE OF CONTENT 1.0 INTRODUCTION .................................................................................................................... 2 2.0 POSITIVE EXTERNALITIES ................................................................................................ 3 3.0 INTERNALIZATION OF EXTERNALITIES ....................................................................... 4 3.1 Corrective Subsidy ....................................................................................................................... 4-5 4.0 CONCLUSION ......................................................................................................................... 6 1
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1.0 INTRODUCTION Externalities is an economic term that refer to the benefits or costs that received by the third parties (other than buyer or seller of an item) where the transaction in market not reflect the price. The third party has no control over the creation of that cost or benefit. A production or consumption from good or service can be both positive or negative externalities. The example of category in third party is such as (household or business). They are affected by buyers’ and sellers’ consumption and production when the externalities are use or prevailed. Their benefits or costs also are not considered by either buyers or sellers of an item of production and consumption that results in externality. The study of externalities is important because the market fails to fully price the external effects generated by some economic activities. This is because market prices tend to reflect the cost sellers charge buyers of a commodity, a price based on the personal utility derived, while ignoring the costs or benefits imposed on third parties. Thus, the pricing mechanism fails to reflect the true or social costs of economic activity so private costs may diverge from social costs. Resources will be allocated on the basis of private consumption and or production decisions and not on social welfare maximising ones and for this reason resources will be allocated inefficiently. The failure of all relevant effects to make their impact on the pricing system will result in a sub-Pareto optimum allocation of resources as the social marginal cost (MSC) of an activity will not equal its marginal private cost (MPC) which equals its price, The real price of the commodity does not fully determine its allocation so the function of the market to efficiently allocate resources based on their true prices breaks down resulting in a misallocation. The existence of externalities will thus lead to a sub-optimal allocation as either too many resources are used in processes conferring uncompensated social costs or
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