Externalities (Economics) - Explained
What are Externalities?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
What are Externalities?
An externality is any positive or negative outcome of an economic activity that affects the population or surrounding environment that is not an intended or suspected effect or result.
Externalities often occur when business activities affect those who are not related to production or consumption of goods and services.
What are Negative Externalities?
Negative externalities are negative in how the affect the public.
For example, waste materials or emission of pollution from industry are negative externalities.
What are Positive Externalities?
Positive externalities are positive in how the affect the public.
For example, new technologies are introduced, the business may increase profit and also provide a benefit to the general population.
Approaches to Overcome Negative Externalities
There are several solutions to problems arises from externalities:
- Taxes - The government may impose Pigovian tax (associated with economist Arthur C. Pigou) which imposes equal tax to the value of negative externality. These taxes significantly discourage business to spread negative externalities.
- Regulations - The Government may impose more regulations on the business to overcome the negative externalities.
- Education - Private and Social Rate of Return
- Government Approaches to Encouraging Innovation
- Public Good
- Public, Private, Club, Common Goods
- Excludable and Rivalrous Goods
- What is the Free Rider Problem for Public Goods?
- Free Rider
- Social Loafing
- Role of Government in Paying for Public Goods
- What is the Tragedy of Commons for Common Resources?
- Income Inequality
- Poverty Line?
- Poverty Trap
- Public Safety Net
- Measuring Income Inequality
- Lorenz Curve
- Ladder of Opportunity
- Tradeoff between Incentives and Income Equality