Environmental quality is a set of properties and characteristics of the environment either generalized or local, as they impinge on human beings and other organisms. It is a measure of the condition of an environment relative to the requirements of one or more species and to any human need. Environmental quality has been continuously declining due to capitalistic mode of functioning.
Environment is a pure public good that can be consumed simultaneously by everyone and from which no one can be excluded. A pure public good is one for which consumption is non-revival and from which it is impossible to exclude a consumer. Pure public goods pose a free-rider problem. As a result, resources are depleted. The contribution of the nature to GDP as well as depletion of natural resources are not accounted in the present system of National Income Enumeration.
In Environmental Economics, one of the most important market failures is caused by negative externalities arising from production and consumption of goods and services. Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market i.e. they affect people not directly involved in the production and consumption of a good or service. They are also known as spill-over effects.
Externalities refer to external effects or spillover effects resulting from the act of production or consumption on the third parties. Externalities arise due to interdependence between economic units.
Externality may be defined as “the cost or benefit imposed by the consumption and production activities of the individuals on the rest of the society not directly involved in these activity and towards which no payment is made”.
The externalities arise from both production and consumption activities and their impact could be beneficial or adverse. Beneficial externalities are called “positive externalities” and adverse ones are called “negative externalities”.
Positive Consumption Externality
When some residents of a locality hire a private security agency to patrol their area, the other residents of the area also benefit from better security without bearing cost.
Negative Consumption Externality
A person smoking cigarette gets may gives satisfaction to that person, but this act causes hardship (dissatisfaction) to the non-smokers who are driven to passive smoking.
Positive Production Externality
The ideal location for beehives is orchards (first growing fields). While bees make honey, they also help in the pollination of apple blossoms. The benefits accrue to both producers (honey as well as apple). This is called ‘reciprocal untraded interdependency.
Suppose training is given for the workers in a company. If those trained workers leave the company to join some other company, the later company gets the benefit of skilled workers without incurring the cost of training.
Negative Production Externality
The emissions and effluents of a factory cause air and water pollution. Water becomes contaminated and unfit for drinking e.g. Tanneries. The innocent community bears the external cost for which it is not compensated.