Economic Analysis for Business Samples †MyAssignmenthelp.com

Question: Discuss about the Economic Analysis for Business. Answer: Introduction Externality is the benefits or costs imposed on the third party not directly or indirectly involved in consumption or production activity. The paper evaluates the external cost imposed on the society when a rider does not wear helmet. It takes into consideration the immediate cost after getting injured from an accident as well as the indirect cost that society has to bear because of this activity (Baumol Blinder, 2015). As a result of negative externality, number of accident and hence, injury per accidents are more than optimal level. A counteractive policy in response to this externality is to impose a tax or fines on person for not wearing helmet. The paper examines the efficiency of such policy with some real world example of countries those already have made compulsory to wear helmet while riding. Externalities related to not wearing helmet A helmet is supposed to protect the rider from sustaining severe injury in head in case accidents happened. A rider should wear a helmet in times of riding bicycle. Researches reveals that wearing helmet reduces the possibility of severe head injuries up to 74 percent during accidents with moto vehicles (Levmore, 2014). A person by not wearing helmet not only harm himself but also imposes additional cost on the society. In this context the issue of negative externality needs to be discussed. Negative externality is defined as an additional cost is incurred from an economic transaction and is suffered by a third party (Hubbard, Garnett Lewis, 2012). When a bicycle rider without wearing helmet met with an accident, then first the person is picked off to the spot of accidents and is then taken to hospital. Because of bare head, the person is likely to get deeper injury then that would occur with helmet. Consequently, there is a higher expense for this person than that would occur with helmet. The sustained injury might prevent the person to join his regular profession and hence need unemployment benefits (Frank, 2016). The head injuries might cause a permanent disability and impose additional cost of unemployment on the society. This explains why the society need to pay extra for recklessness of someone. This recklessness imposes additional cost on other members of the society. The person does not realize the external cost of such behavior and therefore, the activity of not wearing helmet accounts for negative externality (Baumol Blinder, 2015). Figure 1: Market scenario and negative externality from not wearing helmet (Source: as created by author) Figure 1 depicts the market scenario with the presence of a negative externality. The demand curve is shown as DD. When externality is present on the production side then the demand curve reflects marginal benefits to the society. The supply curve is SS. In a competitive market, the supply curve represents marginal private cost as well as marginal social cost (Beeks Lambert, 2018). However, with a negative externality marginal social cost is different from marginal private cost and lies above the marginal private cost. In an unregulated market, equilibrium outcome is where marginal benefit and marginal private cost intersects. This is point A in the diagram the socially efficient output if Q* and corresponding efficient price is P*. The socially optimum outcome is however at the intersection of marginal social cost and marginal benefit. The socially efficient equilibrium point is B. The quantity and price associated with socially efficient equilibrium point is Q1 and P1 respectively . This shows the goods or service with a negative externality is thus overproduced in the market. Similarly, when a rider does not wear helmet the cost of accident is not only imposed on the person but also on the society. The additional health expenditure might in in form of additional health expense by the government when taken to municipal or government hospital, disability that might be resulted from serious injuries and such others (Roach, Harris Codur, 2015). The person suffers more intense injuries from not wearing helmets than that would otherwise be. Government intervention to correct the externality As discussed above, in an unregulated market presence of negative externality results in more output than that socially desired. This is the situation where free market fails to attain an efficient outcome and is known as market failure. In order to restore socially efficient outcome, government need to intervene in the market (Bland Nikiforakis, 2015). The objective of the government is to internalize the external cost and thus help to achieve an efficient and feasible outcome. The two commonly used instrument to correct market failure are tax and subsidy. The use of suitable instrument depends on the nature of externality. In case of negative externality, the appropriate policy is to impose a tax on the activity that generates negative externality. A tax equivalent to the external cost completely internalizes the cost of externality leading to socially desirable outcome (McKenzie Lee, 2016). In order to encourage bicycle rider to wear helmets government should impose a tax on those not wearing helmets. The effectiveness of such tax however depends on the cost-benefit analysis after taxation. If the benefits from not wearing helmet is less than cost of paying tax, then only an individual considers of wearing helmet and not paying tax. Figure 2: Correction of helmet externality through tax (Source: as created by Author) One solution to the problem of negative externality is the imposition of tax. The tax is designed to make the individual to bear the full social cost of the activity. The magnitude of imposed tax should equal the difference between the marginal social cost and marginal private cost (Sieg, 2016). In case of external cost generated because of not wearing helmet, a tax in the form of additional fines should be implemented. Rider once caught without helmet should be subject to additional payment in form of fine or surcharges. Figure 2 describes correction of market failure through imposition of tax. Initially the marginal private cost is lies below the marginal social cost. The demand curve represents marginal cost as usual. Consequently, there is a higher tendency to accidents per rides than that is socially optimum. Now, suppose a tax in form of fine or surcharge is imposed for those not wearing helmets. These riders now have to pay a fine for not having helmet while riding. This increases the cost of not wearing helmet shifting the marginal private cost upward. The marginal private cost with fine coincide with marginal social cost. The benefits of not wearing helmets is merely having a set hair after the ride (Levmore, 2014). The benefit falls short of the additional cost of not wearing helmet. Once riders are encouraged to wear helmets to avoid the tax, accidents per ride reduces moving towards socially optimum. Therefore, fines or tax equivalent to external cost correct the market failure by internal izing the external cost. This is the reason why some countries have laws that make helmet-wearing compulsory. Australia and New Zealand have compulsory helmet laws to reduce accidents and injuries among bicycle riders. The jurisdiction in Canada and US have made it mandatory to wear helmet for all age groups (Le Grand New, 2015). Conclusion The paper discusses negative externality in context of wearing helmet. Riders without helmet tend to suffer more severe injuries than those with helmet. This not only harm the rider alone but also has incremental cost on the society. The injured person when taken to government hospital raises the health cost. Other costs of sustained injury are unemployment benefits and possibility of permanent disability. The presence of negative externality lead to market failure, which calls for government intervention. Government should impose tax or fine for not wearing helmet to correct the externality. Many advanced nations already have legislation mandating helmet for bicycle or motorcycle. References Baumol, W. J., Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning. Beeks, J. C., Lambert, T. (2018). Addressing Externalities: An Externality Factor Tax-Subsidy Proposal.European Journal of Sustainable Development Research,2(2), 19. Bland, J., Nikiforakis, N. (2015). Coordination with third-party externalities.European Economic Review,80, 1-15. Frank, R. H. (2016). Cash on the table: Why traditional theories of market failure fail.Journal of Economic Behavior Organization,126, 130-136. Hubbard, G., Garnett, A., Lewis, P. (2012).Essentials of economics. Pearson Higher Education AU. Le Grand, J., New, B. (2015).Government paternalism: Nanny state or helpful friend?. Princeton University Press. Levmore, S. (2014). From Helmets to Savings and Inheritance Taxes: Regulatory Intensity, Information Revelation, and Internalities.U. chi. l. REv.,81, 229. McKenzie, R. B., Lee, D. R. (2016).Microeconomics for MBAs. Cambridge University Press. Roach, B., Harris, J. M., Codur, A. M. (2015). Microeconomics and the Environment. Sieg, G. (2016). Costs and benefits of a bicycle helmet law for Germany.Transportation,43(5), 935-949.