Editing Externality (section)

==Causes==


[[File:Un pecheur prépare son filet à kerkennah - tunisie.jpg|thumb|right|200px|If there are no rules on how many fish fishers can catch, fishing can lead to resource depletion.]]
Externalities often arise from poorly defined [[property right]]s. While property rights to some things, such as objects, land, and money can be easily defined and protected, air, water, and wild animals often flow freely across personal and political borders, making it much more difficult to assign ownership. This incentivizes agents to consume them without paying the full cost, leading to negative externalities. Positive externalities similarly accrue from poorly defined property rights. For example, a person who gets a flu vaccination cannot own part of the [[herd immunity]] this confers on society, so they may choose not to be vaccinated.

When resources are managed poorly or there are no well-defined property rights, externalities frequently result, especially when it comes to common pool resources. Due to their rivalrous usage and non-excludability, common pool resources including fisheries, forests, and grazing areas are vulnerable to abuse and deterioration when access is unrestrained. Without clearly defined property rights or efficient management structures, people or organizations may misuse common pool resources&nbsp;without thinking through the long-term effects, which might have detrimental externalities on other users and society at large. This phenomenon—famously referred to by Garrett Hardin as the "tragedy of the commons"—highlights people's propensity to put their immediate self-interests ahead of the sustainability of shared resources. <ref>"Environmental and Natural Resource Economics" by Tom Tietenberg and Lynne Lewis</ref>

Imagine, for instance, that there are no rules or limits in place and that several fishers have access to a single fishing area. In order to maintain their way of life and earn income, fishers are motivated to maximize their catches, which eventually causes overfishing and the depletion of fish populations. Fish populations decrease, and as a result, ecosystems are irritated, and the fishing industry experiences financial losses. These consequences have an adverse effect on subsequent generations and other people who depend on the resource. Nevertheless, the reduction of externalities linked to resources in common pools frequently necessitates the adoption of collaborative management approaches, like community-based management frameworks, tradable permits, and quotas. Communities can lessen the tragedy of the commons and encourage sustainable resource use and conservation for the benefit of current and future generations by establishing property rights or controlling access to shared resources. <ref>"Environmental and Natural Resource Economics" by Tom Tietenberg and Lynne Lewis</ref>

Another common cause of externalities is the presence of [[transaction cost]]s.<ref>{{Citation|last=Dahlman|first=Carl J.|title=The Problem of Externality|work=The Journal of Law & Economics|pages=141–162}}</ref> Transaction costs are the cost of making an economic trade. These costs prevent economic agents from making exchanges they should be making. The costs of the transaction outweigh the benefit to the agent. When not all mutually beneficial exchanges occur in a market, that market is inefficient. Without transaction costs, agents could freely negotiate and internalize all externalities.

In order to further understand transactional costs, it is crucial to discuss Ronald Coase's methodologies. The standard theory of externalities, which holds that internalizing external costs or benefits requires government action through measures like Pigovian taxes or regulations, has been challenged by Coase. He presents the idea of transaction costs, which include the expenses related to reaching, upholding, and keeping an eye on agreements between parties. In the existence of externalities, transaction costs may hinder the effectiveness of private bargaining and result in worse-than-ideal results, according to Coase. He does, however, contend that private parties can establish mutually advantageous arrangements to internalize externalities without the involvement of the government, provided that there are minimal transaction costs and clearly defined property rights. Nevertheless, Coase uses the example of the distribution of property rights between a farmer and a rancher to support his claims. Assume there is a negative externality because the farmer's crops are harmed by the rancher's livestock. In a society where property rights are well-defined and transaction costs are minimal, the farmer and rancher can work out a voluntary agreement to settle the dispute. For example, the farmer may invest in preventive measures to lessen the impact, or the rancher could pay the farmer back for the harm the cattle caused. Coase's approach emphasizes how crucial it is to take property rights and transaction costs into account when managing externalities. He highlights that voluntary transactions between private parties can allow private parties to internalise externalities and that property rights distribution and transaction cost reduction can help make this possible. <ref>"The Problem of Social Cost" by Ronald Coase</ref>