3 30 INTERNALIZATION OF EXTERNALITIES Internalization of externalities happen

3 30 internalization of externalities internalization

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3.0 INTERNALIZATION OF EXTERNALITIES Internalization of externalities happen when the marginal private benefit (MPB) or cost (MPC) of goods and service are adjusted so that the users consider the actual marginal social benefits (MSB) and cost (MSC) of their decision. The users are preferred the actual marginal social benefit or cost to make a decision. For positive externalities, the marginal external benefit (MEB) is added to marginal private benefit (MPB) to internalize the externality. It will affect the changes in prices to reflect full marginal social cost (MSC) or benefit (MSB) of a good. However, identification of the individuals is needed for externalities through the measurement of the monetary value of the MEB or MEC. Usually, the data for measurement and identification are not easy to find. Thus, the necessary information on individual are need to find for internalizing the externality to avoid any disagreement among the economists. 3.1 Corrective Subsidy One of the way to internalize externalities through corrective subsidy. Corrective subsidy can be definite when the government made a payment to either buyers or sellers of a good that result decrease in price that need to pay by consumer. In fact, corrective subsidies are one of the only way to internalize positive externalities. The marginal external benefit (MEB) of goods or service must be equal or same with the payment that have been made by government to the buyers or sellers. The provisions of certain government services at levels below marginal costs are include in the corrective subsidies. For example, in Malaysia, “Majlis Perbandaran” and “Majlis Daerah” make special pickup of trash at prices below marginal costs. To avoid a bundle amount of trash, an internalization using corrective subsidy by using the difference between marginal costs and actual price. To make it clear, it can be look through a diagram that shows about corrective subsidy for inoculations that result in the efficient output of this good. 4
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Initially, the competitive market price is 25$ per inoculations and the competitive market equilibrium is 10 million inoculations per year. Since MSC is less than MSB (MPBi +MEB) at that level of consumption, it leads to the inefficient for the market price. This leads to under allocation of resources. Each person that inoculated associated with $20 marginal external benefit (MEB). This is due to the payment made by government to the buyers or sellers that are equal to marginal external benefit (MEB). In this case, government made a payment to each person inoculated with $20 of subsidy that will add to the marginal private benefit (MPB) of each inoculation.
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  • Summer '16
  • Externality, MEB

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