Resource Allocation
Resource allocation is division of goods for the use of production within the economy. The needs and wants of society as well as industries impact what is produced. Suppliers focus on producing the varieties of goods and services that will yield the greatest satisfaction to consumers. In the long run, externalities directly impact resource allocation. It must be determined whether the production, as well as the process of production, creates more benefits that costs for the producers, consumers, and society as a whole.
Externalities
An externality is a cost or benefit that affects a party who did not choose to incur the cost or benefit. In regards to natural resources, production and use of resources can have a positive or negative effect on the allocation of the resources.
External Costs
A negative externality, also called the external cost, imposes a negative effect on a third party to an economic transaction. Many negative externalities impact natural resources negatively because of the environmental consequences of production and use. For example, air pollution from factories and vehicles can cause damage to crops . Likewise, water pollution has a negative impact of plants and animals.
Negative externality
Air pollution from vehicles is an example of a negative externality. It affects other than those who drive the vehicle and those who sell the gas.
In the case of negative externalities, the marginal private cost of consuming a good is less than the marginal social or public cost. The marginal social benefit should equal the marginal social cost (i.e. production should only be increased when the marginal social benefit exceeds the marginal social cost). When external costs are present, the use of natural resources is inefficient because the social benefit is less than the social cost. In other words, society and the natural resources involved would have been better off if the natural resources had not been used at all.
Developed countries use more natural resources and must enact sustainable development plan for the use of resources. Human needs must be met, but the environment and natural resources must be preserved. Examples of resource depletion include mining, petroleum extraction, fishing, forestry, and agriculture.
External Benefits
Positive externalities, also referred to as external benefits, impose a positive effect on a third party. An example of a positive externality is when crops are pollinated by bees from a neighboring bee farm. In order to achieve the socially optimal equilibrium, the marginal social benefit should equal the marginal social cost (i.e. production should be increased as long as the marginal social benefit exceeds the marginal social cost). Assuming that natural resources are used and also sustained, the external benefits of goods produced by natural resources impacts the majority of the public in a positive way.