What Is Meant by Externalities? How Have Oil Companies in Trinidad and Tobago Employed Solutions to Externalities as Part of Their Corporate Social Responsibilities (Csr)?
Externalities exist when a third party bears costs or receives benefits arising from an economic transaction in which he or she is not a direct participant. This occurs when producers or consumers provide benefits to third parties or impose costs on third parties for which the market system does not enable them to receive full payment in return. A harmful externality occurs, for example, when a factory generates pollution. Individuals who live and work in the neighbourhood bear costs arising from the factory's production, including adverse health effects and …show more content…
A reciprocal externality is a spillover that results from competing incompatible uses of resources. The Coase Theorem states that reciprocal externality generators and recipients will choose efficient activity levels whatever the initial liability assignment, through bargaining.
One simple approach to solving externalities is basically to prohibit the action that generates the external effects. However, upon reflection, this may seem impractical. Therefore, an optimal solution does not require that externalities be completely eliminated, but rather that the right amount of them be eliminated.
An example of this may be seen with the BP Energy Company of Trinidad and Tobago. Significant contribution has been made by BPTT to BP Global's goal of reducing 2003 Green House Gas emissions by 53% Although targets for Green House Gases are not yet legally regulated in Trinidad & Tobago, bpTT has shown commitment reduce flared gas emissions. Through the introduction of performance management systems and flare trading agreements owned by operations offshore, BPTT successfully reduced flared gas emissions to 5.4 mmsfcd (million cubic feet per day), 33% below target.
As outright prohibition is often suboptimal, another possibility that has been suggested is to let the government decide just how much of the externality may be produced.