Externalities Impact

Introduction

In economics, there has been great interest given to the effects of externalities on many fields of business and on the development and progress of different infrastructures. An externality can be defined as an effect of a third party that occurs as a result of services and goods production or consumption without paying suitable compensation for it. Market failure can occur when full costs and benefits are not considered by the price mechanism. There are negative externalities and positive externalities. Negative externalities occur if there are imposed costs on a third party caused by consumption or production. This can lead to harms to the environment such as pollution or noise. A positive externality occurs when there are benefits for a third party due to the consumption or production of a good or a service. The current paper is discussing the negative and positive effects and impacts of externalities on an infrastructure which is transportation.  (Reggiani and Button, 2011)

An example of a positive externality associated with the development of transportation

Accessibility is a positive externality which is associated with transportation development as the development of transportation enables people to reach services and activities everywhere and it represents the time and costs people spend on transportation.  There are many impacts of accessibility on transportation development as transportation needs to develop in order to raise accessibility quality. Transportation development depends on improving accessibility and the factors affecting it. Accessibility is considered a positive externality associated with transportation development due to many reasons as when traffic jam is reduced, this improves accessibility as congestion costs are reduced, this provides both individuals and society with benefits. Transport options improvement can also improve accessibility. The improvements can be seen in many aspects such as speed of means of transport, luxury, comfort, security level, service level, affordability and high quality services of transportation which is made for serving Accessibility and raising its level. To develop transport, it is necessary to understand people's needs of accessibility in addition to learn about the travel mode constraints and people's ability to afford costs of transportation. Transportation information is required to evaluate accessibility and such information should include users' information and information about the transportation quality. System integration can affect accessibility, for example, parking convenience and transferring between transportation modes should be improved in order to improve accessibility. Links and modes connections among each other affect accessibility that's why transportation development takes this into consideration. Accessibility of transportation modes is also affected by transportation terminals location and quality as accessibility is affected by the modes' quality such as bus stops, ferry terminals and train stations and other modes of transportation. Automobile accessibility is affected by transportation availability, price and parking convenience. This makes it very important to develop facilities of transportation and raise the quality of transportation modes. Accessibility needs to be evaluated from time to time in order to learn about the needs of users of transportation, efficiency of means of transport and level of services provided to people whether to serve transportation to local areas or long destinations. (Jimsd, 2006)

An example of a negative externality associated with the development of transportation

Accidents are considered a negative externality associated with transportation development for many reasons. Accidents resulting from transportation use cause many costs on both individuals and society such as the increasing number of deaths, injuries costs on injured persons and their families and on the society embodied in many costs that affect both individuals and society services as such costs can be difficult to be affordable by the government.  (VYSKOČILOVÁ, A., TECL, J., VALACH, O, 2013 )Development of transportation means increases the of accidents on individuals and society due to the rise in using transportation means and studying such costs and evaluating them can help develop transportation means in a way that reduces negative results from the accidents such as the costs which can be divided into direct costs and indirect costs. Accidents can also be divided into accidents with fatal injuries, accidents with serious injuries and accidents with slight injuries.  Direct costs resulting from accident caused by means of transportation include police effort, healthcare, fire rescue services costs, court, material damage, administrational costs and insurance costs.  Indirect costs which usually appear in the long term after accidents include production losses which result from delaying of production according to the jobs of injured people and social costs represented in the pensions provided for orphans, widows and disabled persons as a result of road accidents. (Rodrigue, 2015)

How the positive and negative externalities relate to the willingness to pay (WTP) analysis

Positive and negative externalities are related to the (WTP) analysis as the impacts related to externalities can be assessed economically by contingent valuation in order to find out new policies to address the negative externalities and help improve the positive externalities. For example,; measurements  and estimations of transportation negative externalities such as pollution, accidents and noise can help realize the volume of such externalities in each local area in order to reduce their impact on transportation development.  Surveys  and questionnaire analysis can be used to make such assessments. Willingness to pay (WTP) is what a person can ultimately provide to pay for a service or avoid its negative effects, so externalities which could be positive or negative can be studied and evaluated in order to measure people's WTP for them. Goods and services have prices which should be balanced between buyers' willingness to pay for them and sellers' willingness to accept them.  WTP value can be measured through many methods such as choice modeling. There are many approaches for WTP analysis that are used to measure costing and benefits of externalities such as the HC human capital approach, WTP analysis is used to reduce risks of negative externalities such as death rates and air pollution as negative externalities related to transportation and they are also used to improve positive externalities such as accessibility which is related to transportation. (Ortu¨ zar et al, 2000)

Conclusion

Transportation is a very important infrastructure which has many externalities related to it as they can be positive externalities or negative ones. Accessibility is an example of positive externalities related to transportation development as users' needs have to be well assessed in order to develop transportation. Road accidents are among the negative externalities which are associated with transportation development and they cause many costs on both individuals and society and they can be either direct or indirect costs.  WTP analysis is used to measure and estimate how positive externalities can be improved and how negative externalities can be avoided or reduced so there is a relation between externalities and WTP analysis.