The limitations applied to varied products, especially medical supplies, food, and personal protection equipment (PPE). The outbreak of COVID-19 resulted in many adverse outcomes for societies around the world, including an unprecedented increase in governmental restrictions on exports. This conclusion is especially relevant to multinationals from developed countries. Simultaneously, managers of MNCs should be aware that post COVID-19, there will likely be more restrictions on the free flow of commodities around the globe due to suboptimal production of essentials at the home country. Policymakers can use the argument presented here to justify interference in free international trade and production locations for essential products, based on a robust economic argument. This finding is relevant for policymakers and multinational managers alike. This happens because production abroad creates costs for the home society that the MNC does not consider in its decision-making process. A multinational company (MNC) seeking to optimize profits by shifting production to lower-cost host countries produces too much abroad and too little locally (i.e., in their home country) from the societal perspective of the home country. This leads to production locations that are suboptimal for society in the country where the company is headquartered. A simple graphic model, which is based on the results of a more sophisticated analytical model, shows that the decision to produce essential products at foreign locations does not consider negative externality from the home country’s perspective. Social efficiency occurs at a lower output (Q2) – where social marginal benefit = social marginal cost.This article highlights a unique issue emerging from the extensive restrictions on exports imposed by many countries due to COVID-19. The red triangle is the area of dead-weight welfare loss.But at this output, the social marginal cost is greater than the social marginal benefit. Consuming cigarettes causes passive smoking to others in the vacinity.ĭiagram of negative externality in consumption.Consuming loud music late at night keeps your neighbours awake.Consuming alcohol leads to an increase in drunkenness, increased risk of car accidents and social disorder.Examples of negative externalities of consumption In this case, the social benefit is less than the private benefit. This occurs when consuming a good causes a harmful effect to a third party. The tax equals the external cost of production. The easiest policy to achieve the socially efficient level of output Q2 is using tax. The socially efficient level of output occurs where the Social marginal cost (SMC) = Social Marginal Benefit (SMB). This makes common sense, just think of rush hour traffic – there tends to be overconsumption of driving because people ignore the costs to others. Therefore, in a free market we get overconsumption. when driving you consider the cost of petrol, but, not the fact that congestion and pollution increases causing problems for others.)īecause of externalities such as pollution, the social cost of driving is higher than the private cost.
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