Externalities
- See definition and ‘examples’
Costs and Benefits
- Economists are interested in externalities because of the various costs and benefits that arise out of the actions of others
- There are 3 types of costs and benefits:
- Private Costs and Private Benefits
- There are experienced by the people who are directly involved in the decision to take a particular action
- External Costs and External Benefits
- These are a consequence of externalities that arise from a particular action
- They fall on third parties instead of those responsible for the action
- Social Costs and Social Benefits
- These are the total costs and benefits to society as a result of a particular action
- By definition, they consist of private costs and benefits and any external costs and benefits that arise
- A problem therefore arises when the private costs or benefits do not equal the social costs or benefits
- The external costs or benefit distort the efficiency allocation of resources
- It is for this reason that the market fails to produce the best allocation of resources
Negative Externalities
- There are several cases where negative externalities may exist
- This means that there are costs imposed on a third party over and above the costs directly paid for by those who carry out the activity
- See example table
Positive Externalities
- Examples of positive externalities are not as obvious or common as instances of negative externalities
- As a consequence of positive externalities, the benefits received by a third part are over and above those that are received by the people who carried out the activity.
