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Jan 24, 2024 · An externality is a cost or benefit that affects a third party without their consent or compensation. Learn about positive and negative externalities, how they arise from production or consumption, and how governments and companies can address them.
- Will Kenton
- 2 min
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced components that are involved in either consumer or producer market transactions. Air pollution from motor vehicles is one example.
Externalities are impacts of production or consumption on third parties not involved in the transaction. They can be positive or negative and require government intervention to overcome them. Learn more about Pigou's theory, diagrams and examples of externalities.
- Positive Externality in ProductionA farmer grows apple trees. An external benefit is that he provides nectar for a nearby beekeeper who gains increased honey as a result of the farm...
- Negative Externality in ProductionMaking furniture by cutting down rainforests in the Amazon leads to negative externalities to other people. Firstly it harms the indigenous people...
- Positive Externality in ConsumptionEducation. If you take a three-year training course in information technology, you gain personal skills, but also other people in the economy can b...
- Negative Externality in ConsumptionIf you smoke in a crowded room, other people have to breathe in your smoke. This is unpleasant for them and can leave them exposed to health proble...
Learn what an externality is, how it affects markets and society, and how it can be solved. Find out the types of externalities (negative and positive), examples, and government interventions.
Dec 29, 2020 · Introduction. An externality is a cost or benefit which produces by an economic unit but effects third parties, unrelated to that unit. Externalities play a crucial role on economic growth. The effect of a market mechanism on third parties who is external called also spread effect. Externalities may be positive or negative.
- Serpil Kahraman
- serpil.kahraman@yasar.edu.tr
Most externalities fall into the category of so-called technical externalities; that is, the indirect effects have an impact on the consumption and production opportunities of others, but the price of the product does not take those externalities into account. As a result, there are differences between private returns or costs and the returns ...
Insofar as an externality is a public good (averting a negative externality or providing a positive one), one approach is to use a non-profit entity like a government or non-profit to profit. So far we’ve also discussed examples where Pigouvian taxes — named after the English economist Arthur Cecil Pigou — and subsidies can correct for ...
