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Introduction
According to “an externality exists when the action of one person directly affects the utility of another individual in the absence of well-defined property rights” (Moss & Schmitz, 2013, p. 402). In other words, externalities are regarded as beneficial and adverse consequences of any economic activity on third parties unrelated to the performed activity and business as such, i.e., stakeholders whose interests are not taken into account.
There are multiple examples of negative and positive externalities in all production industries including agriculture. For example, such activities as the development of water resources and the consequent water allocation are commonly associated with adverse externalities including the reduced supply of water to urban areas and environmental deterioration as opposed to the increased agricultural consumption of water for lower-valued produce (Moss & Schmitz, 2013). However, agricultural production practices may have some favorable social effects as well. Moreover, in particular situations and context, agrarian activities may generate more positive social outcomes than private ones.
Externalities in production
A small-scope production of plant cultures in an arid, rural area located in a developing country will be regarded as an example of the economic activity associated with positive externalities. One of the main private organizational advantages generated as a result of such an activity is revenue inflow. Additionally, by establishing a business in an environment characterized by low competition levels and a relatively high unemployment rate, the company may largely benefit from the availability of an unoccupied labor force. To a significant extent, this may favorably impact organizational productivity and profitability.
At the same time, the positive social benefits of the selected arid-zone agricultural production activity can be many. Some of them are the provision of new job opportunities, community development, creation of new farm field habitats, boosted soil fertility, water conservation, oxygenation of air, and prevention of soil erosion (Greentumble Editorial Team). For instance, increased water pumping may lead to a rise in the surface flow of water “by augmenting the shallow surficial aquifers” (Moss & Schmitz, 2013, p. 402).
As Moss and Schmitz (2013) note, the given environmental change can provide new recreational opportunities for residents and businesses in an area with unsustainable water dynamics. Overall, in case, the amount of all marginal social benefits is above marginal social costs, the agricultural activity will result in locals’ improved quality of life.
Third parties can enjoy some benefits associated with the production project as well. For instance, in case the business growth results in the rural area and community development, it may help other local businessmen, e.g., cafe and shop owners, increase the organizational welfare as the improved financial status of residents due to engagement in the production can lead to a significant increase in consumption rates.
Along with this, some people may start to use the technologies and practices, e.g., particular effective soil fertilization methods, earthwork techniques, etc., introduced at the production site free of charge either for commercial or non-commercial purposes. In this way, as a by-product of the realization of the selected agricultural project, technological advancement and knowledge can become widespread benefits.
Conclusion
The activity analysis reveals that if social benefits are generated indirectly, they can be considered positive production externalities. However, it is also essential to take into account such a condition as the number of positive costs, e.g., chemical fertilizer and pesticide usage contributing to soil and surface water contamination, etc. as they should not outweigh the mentioned benefits. Overall, the selected case demonstrates that while negative externalities in agricultural production are commonly associated with pollution and inefficient allocation of resources, activities performed in particular environmental contexts and under specific conditions may promote significant positive externalities.
References
Greentumble Editorial Team. (2016). Positive effects of agriculture on the environment. Web.
Moss, C. B., & Schmitz, A. (2013). Positive and negative externalities in agricultural production: The case of Adena Springs Ranch. Journal of Agricultural and Applied Economics, 45(3), 401-409.
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