- "In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity."
The costs or benefits that affect people who are not involved in a market transaction. For example, pollution is a negative externality that imposes costs on society as a whole, while education is a positive externality that benefits society.
Definition of Externalities: This topic introduces the concept of externalities and its definition. It explains why externalities can occur either positively or negatively and gives examples of each.
Types of Externalities: This topic highlights the two types of externalities: negative and positive. It provides clear examples of each and how they can affect individuals, firms or society at large.
The Coase Theorem: The Coase Theorem is a theory that explains how private bargaining between parties affected by externalities can lead to an efficient outcome. This topic provides a detailed explanation of the theorem and how it can be applied.
Public Goods: This topic describes public goods, which are goods that are non-excludable and non-rivalrous. It explains how public goods can be affected by externalities and why they require government intervention.
Market Failure: This topic explains how externalities can cause market failure, where the market fails to allocate resources efficiently. It highlights the role of government in correcting market failure caused by externalities.
Pigouvian Tax: This topic introduces the idea of Pigouvian taxes, which are taxes implemented to correct negative externalities. It gives an overview of the concept and how it can help improve market efficiency.
Externalities and Social Welfare: This topic provides an understanding of how externalities can affect social welfare. It explains how externalities can lead to sub-optimal outcomes and reduce social welfare.
The Tragedy of the Commons: The Tragedy of the Commons is a common occurrence when there is no ownership of a resource. This topic explains the tragedy of the commons and the role externalities play in its occurrence.
Public Choice Theory: This topic highlights public choice theory, which explores how individuals and groups make decisions in society that affect public goods and their outcomes.
Behavioural Economics and Externalities: This topic explores how behavioural economics can affect externalities. It explains why individuals may not always act rationally and how this affects the market outcomes.
Positive Production Externality: When the production of a good or service benefits those who are not involved in the production process.
Negative Production Externality: When the production of a good or service has a negative effect on those who are not involved in the production process.
Positive Consumption Externality: When the consumption of a good or service benefits those who are not directly involved in the consumption process.
Negative Consumption Externality: When the consumption of a good or service has a negative effect on those who are not directly involved in the consumption process.
Network Externality: When the value of a good or service is dependent on how many other people use it.
Information Externality: When the availability of information affects the behavior of economic agents in the market.
Technological Externality: When the production or consumption of a good or service affects the development of technology in the economy.
Public Goods: Goods or services that are non-excludable and non-rival in consumption.
Club Goods: Goods or services that are non-rival in consumption but excludable.
Common-Pool Resources: Shared resources which are rival in consumption but not excludable.
- "Air pollution from motor vehicles is one example."
- "Water pollution from mills and factories is another example. All consumers are made worse off by pollution but are not compensated by the market for this damage."
- "A positive externality is when an individual's consumption in a market increases the well-being of others, but the individual does not charge the third party for the benefit."
- "An example of this might be the apartment above a bakery receiving the benefit of enjoyment from smelling fresh pastries every morning. The people who live in the apartment do not compensate the bakery for this benefit."
- "The concept of externality was first developed by economist Arthur Pigou in the 1920s."
- "Pigou argued that a tax, equal to the marginal damage or marginal external cost, (later called a 'Pigouvian tax') on negative externalities could be used to reduce their incidence to an efficient level."
- "Externalities are an example of market failure because the production or consumption of a product or service's private price equilibrium cannot reflect the true costs or benefits of that product or service for society as a whole."
- "Governments and institutions often take actions to internalize externalities, thus market-priced transactions can incorporate all the benefits and costs associated with transactions between economic agents."
- "The most common way this is done is by imposing taxes on the producers of this externality."
- "Once the externality is internalized through imposing a tax, the competitive equilibrium is now Pareto optimal."
- "However, since regulators do not always have all the information on the externality, it can be difficult to impose the right tax."
- "For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society."
- "The neighbors of individuals who choose to fire-proof their homes may benefit from a reduced risk of a fire spreading to their own houses."
- "If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs."
- "Because responsibility or consequence for self-directed action lies partly outside the self, an element of externalization is involved."
- "If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others."
- "Externalities can be considered as unpriced goods involved in either consumer or producer market transactions."
- "Air pollution from motor vehicles is one example."
- "Externalities cause the externality competitive equilibrium to not adhere to the condition of Pareto optimality."