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.

Related Topics

• Market Competition and Innovation
• New Technology and Positive Externalities

• Externality
• Network Externality
• Pigovian Tax
• Coase Theorem
• Agglomeration Diseconomies

• 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