Positive & Negative externalities

What is a positive externality?

When production or consumption of a good or service creates benefits to third parties that are not involved in the transaction.

What is a positive externality?

When production or consumption of a good or service imposes costs to third parties that are not involved in the transaction.

What are externalities the difference between?

Private and social costs or benefits.

What do social costs/benefits include?

Both the direct impact on the producer or consumer and any indirect impacts on third parties.

What is a private cost?

Cost experienced directly by producer or consumer involved in the economic transaction.

What is an external cost?

A cost experienced by third parties who are not directly involved in the transaction.

What is a social costs?

Total cost to society, including both private and external costs.

Examples of positive externalities

• Education

• Research

Examples of negative externalities of production

• Air pollution

• Traffic congestion

• Noise pollution

What can production and consumption lead to?

Negative externalities.

What can negative externalities lead to?

They are not reflected in market price, leading to market failure and resource misallocation.

Negative externalities due to consumption

• Secondhand smoke

• Alcohol consumption

• Traffic congestion due to car usage.