Externalities and Government Intervention: Prices Do Not Capture All Costs

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Technology has advantages like the increase in production with a smaller cost for the company. However, technology also replaces men in labor, producing unemployment. Every day, the world faces more research activity, and the technological development grows constantly offering new and more effective methods of production. With the time, technology has become indispensable for some firms, which line of production would be dramatically hindered without technology.

This situation lets us think of technology as an externality in the market. That is, the introduction of new machinery to a company, with the purpose of increasing the production, using less time, and lowering costs, seems like the perfect move to obtain a successful
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For example, the research into new technologies which can then be disseminated for use by other producers. These technology spill-over effects help to reduce the costs of other producers, and cost savings might be passed on to consumers through lower prices. Another suitable example would be, an increase in the research of health care, reducing illness and creating a better quality of life and higher living standards.

A Positive Externality Leading to a Market Failure
This is a very interesting topic, in which a positive externality leads us to a market failure. Let’s explain this with the example mentioned above. We have a very big positive externality: a well functioning health care service bringing less sickness and illness. However, despite the fact that it has these positive effects, it causes a failure in the market: having less sickness means less people going to the hospital, and therefore less income for the health care institution. Here one faces the contradiction: economically speaking, what is best for the company? Keeping the technology and offering more effective health treatments, but having less income? Or having constant demand without new technology, but risking human lives. There are aspects beyond economy in this situation which involve moral principles, and ethic.

Technology as a Negative Externality
First of all, to be able to speak about a negative externality, there has to be a

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