Chapter 10: Externalities

external image pollution.jpeg

Externalities in economics are things that influence people in a market without any formal transaction taking place for the externality.
The easiest way to understand externalities is to think of the most pervasive negative externality: Pollution.

Pollution is a by-product of economic activity. Factories produce it as a by-product when manufacturing products. Cars produce it as a by-product of transportation. In other words, pollution is not produced for any purpose. People don't manufacture products or drive their cars in order to produce pollution, they produce pollution in order to manufacture their products and drive their cars. However pollution takes a toll on the environment, and society as a whole often has to pay the cost. The private corporation or entities that produce the pollution however do not pay all of this cost.

So with negative externalities private corporations force the rest of society to pay a cost in the long-run. So basically people are paying more for a product or service than they actually realize. As seen by this graph, this causes deadweight loss.


However there are also positive externalities.


Positive externalities happen when people get more for a service than they pay for, exactly the opposite of negative externalities. An easy way to think of a positive externality is to think of the exact opposite of pollution: beautiful parks and gardens.


Such gardens and parks are available to many different people. It's available to anyone who wants to just walk by, meaning it's non-inclusive. Being non-inclusive anyone who wants to enjoy is can, even people who haven't paid for the creation of it. However as seen in the graph above, this creates deadweight-loss again, as producers aren't fully able to achieve the profits they deserve.


1. What are externalities and how many type are there?
2. Name 1 of each type of externality.

1. Externalities are effects that the market/economy causes on a bystander, there are 2 types of externalities: negative and positive externalities.
2. An example of a negative externality can be pollution, and a example of a positive externality can be park, statue, etc.