EXTERNALITIES

• Externalities


  A cost or benefit incurred or received by a third party who has no control over the factors that created the cost or benefit
• Types of Externalities

  • Negative Externalities
  • Positive Externalities
• Negative Externalities

  • Occur when the production or consumption of a good or services exerts a negative effect on a third party
• Negative Externalities

  • Water Pollution
  • Habitat Destruction
• Positive Externalities


  • Occur when the production or consumption of a good or service causes a benefit to a third party
• Positive Externalities

  • Vaccine
• Negative Production Externalities


  • Occur when the production process results in a harmful effect on unrelated third parties
• Negative Production Externalities

  • Pollution
• Negative Consumption Externalities

  • Occur when consuming a good or service has a detrimental impact on others who are not directly involved in the consumption or transaction
• Negative Consumption Externalities

  • Smoking cigarettes
• Positive Production Externalities

  When a firm's production increases the well-being of others but the firm is not compensated by those others
• Positive Production Externalities

  • Beehives of honey producers have a positive impact on pollination and agricultural output
• Positive Consumption Externalities

  When someone's consumption benefits others without receiving compensation from them
• Positive Consumption Externalities

  • Buying flowers for front garden gives benefits to others who walk past
• Externality Solutions

  • Taxes
  • Subsidies
  • Government Regulation
• Taxes


  One solution to overcoming externalities
• Subsidies

  Can also overcome negative externalities by encouraging the consumption of a positive externality
• Government Regulation

  Governments can implement regulations to offset the effects of externalities, considered the most common solution