The Spillover Principle states that sometimes decision makers are not in positions to achieve all their desired benefits or bear all the costs that occur as a result of their decisions. For example, poor disposal of wastes from a manufacturing company can have negative impacts to the people living next to the plant. On the other hand, the existence of the products from the plant can have unanticipated and unplanned benefits in society that exceeds the financial benefits anticipated by the manufacturer (Allen, 2011). Goods with negative externalities are those in which the costs of production or consumption are not limited to the producers or the consumers of the goods. An example is release of untreated sewage to water bodies, which eventually cause water pollution. Goods with positive externalities are those which the benefits of production or consumption are not restricted to the producer or consumers of the goods. An example is a flood controlled dam, which eventually benefits all people in the neighborhood regardless of who pays for the management of the dam.
The spillover benefits and costs are seen as possible causes of problems in an economy because producers and consumers fail to make decisions based on total costs including the spillovers. They instead make decisions based on their own benefits and costs; this means the amount of goods consumed or produced may not be ideal. Since externalities impact allocation of resources, it is important to determine whether the production process creates more benefits than costs for the consumers, producers and the society at large (Allen, 2011). The goods should be allocated in a manner that natural resources are used while being sustained; this means that external benefits of goods produced through the use of the natural resources will have positive impacts to the public.
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