1.3.2 Externalities

Private Costs

Costs incurred by producers or consumers directly involved in a transaction or economic activity.

External Costs (Negative Externalities)

Costs imposed on third parties who are not part of the transaction or activity.

Social Costs

Total costs of an economic activity, including both private costs and external costs.

Private Benefits

Benefits received by producers or consumers directly involved in a transaction or economic activity.

External Benefits (Positive Externalities)

Benefits received by third parties who are not part of the transaction or activity.

Social Benefits

Total benefits of an economic activity, including both private benefits and external benefits.

Impact of Negative Externalities

Overproduction of goods with negative externalities and overconsumption due to incomplete consideration of external costs.

Impact of Positive Externalities

Underproduction of goods with positive externalities and underconsumption due to incomplete appreciation of external benefits.

Government Intervention

Correcting externalities through policies such as taxes and subsidies, and using regulations to limit external costs or promote external benefits.