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• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: Cost and Benefit Externalities; Canada; Newfoundland
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.198.514; http://www.aw.com/info/bruce/ch04_bruce.pdf

found one of the richest cod fisheries in the world on the Grand Banks and Georges Bank off Newfoundland and New England. This fishery proved to be a rich economic resource, and it played no small role in the early economic development of North America as a source of exports. By 1992, the government of Canada had to close the Grand Banks fishery because of plummeting fish harvests; in New England, the Georges Bank fishery was closed two years later. What went wrong here? Why didn’t the invisible hand of market forces lead those who were dependent on the fishery for their livelihood to husband this valuable resource to prevent its depletion? A fishery is a good example of an industry plagued by an externality. An externality is present when an action by an individual producer or consumer affects other parties, without payment or compensation for the cost or benefit affecting them. An externality exists in the fishery because one person’s fishing activity decreases the stock of fish, making it necessary for others to fish longer in order to catch a given quantity of fish. The individual fisher ignores this external cost on others when deciding how much to fish. Many economic activities, as well as fishing, have external costs. These costs may result from the excessive depletion of resources, hazards to the public’s safety, the pollution of air and water, and other things. The presence of externalities is a form of market failure, meaning that the market allocation of resources is not efficient. The inefficiency caused by externalities means that the government can improve efficiency and potentially make everyone in the economy better off. The government does this with policies controlling the activities that have externalities. For example, a large body of government regulation is directed at controlling activities that pollute the environment. TYPES OF EXTERNALITIES The concept of an externality is quite general, and economists have identified and classified many different types of externalities. In this section, ...