A positive externality occurs when the actions of one party result in benefits for others who are not directly involved in the activity. It is a beneficial side effect that is not accounted for in the market transaction. Positive externalities lead to an underallocation of resources in the market.
Key Facts
- A positive externality occurs when the actions of one party result in benefits for others who are not directly involved in the activity.
- It is a beneficial side effect that is not accounted for in the market transaction.
- Positive externalities lead to an underallocation of resources in the market.
- Examples of positive externalities include:
- Education: When individuals receive education, it not only benefits them but also society as a whole by creating a more knowledgeable and skilled workforce.
- Vaccinations: When individuals get vaccinated, it not only protects them from diseases but also helps in preventing the spread of diseases to others.
Negative Externality:
- A negative externality occurs when the actions of one party impose costs on others who are not directly involved in the activity.
- It is a harmful side effect that is not accounted for in the market transaction.
- Negative externalities lead to an overallocation of resources in the market.
- Examples of negative externalities include:
- Pollution: When factories emit pollutants into the air or water, it harms the environment and affects the health of nearby residents.
- Traffic congestion: When too many cars are on the road, it leads to increased travel time and frustration for other drivers.
Examples of positive externalities include:
- Education: When individuals receive education, it not only benefits them but also society as a whole by creating a more knowledgeable and skilled workforce.
- Vaccinations: When individuals get vaccinated, it not only protects them from diseases but also helps in preventing the spread of diseases to others.
Negative Externalities
A negative externality occurs when the actions of one party impose costs on others who are not directly involved in the activity. It is a harmful side effect that is not accounted for in the market transaction. Negative externalities lead to an overallocation of resources in the market.
Examples of negative externalities include:
- Pollution: When factories emit pollutants into the air or water, it harms the environment and affects the health of nearby residents.
- Traffic congestion: When too many cars are on the road, it leads to increased travel time and frustration for other drivers.
Sources
- Indeed: Positive and Negative Externalities
- Investopedia: Externality
- St. Louis Fed: Economic Lowdown Podcast Series – Episode 11: Externalities
FAQs
What is a positive externality?
**Answer:** A positive externality occurs when the actions of one party result in benefits for others who are not directly involved in the activity. It is a beneficial side effect that is not accounted for in the market transaction.
What is a negative externality?
**Answer:** A negative externality occurs when the actions of one party impose costs on others who are not directly involved in the activity. It is a harmful side effect that is not accounted for in the market transaction.
Give an example of a positive externality.
**Answer:** Education is an example of a positive externality. When individuals receive education, it not only benefits them but also society as a whole by creating a more knowledgeable and skilled workforce.
Give an example of a negative externality.
**Answer:** Pollution is an example of a negative externality. When factories emit pollutants into the air or water, it harms the environment and affects the health of nearby residents.
How do positive externalities affect the market?
**Answer:** Positive externalities lead to an underallocation of resources in the market. This is because the benefits of the activity are not fully reflected in the price of the good or service.
How do negative externalities affect the market?
**Answer:** Negative externalities lead to an overallocation of resources in the market. This is because the costs of the activity are not fully reflected in the price of the good or service.
What are some ways to address externalities?
**Answer:** There are a number of ways to address externalities, including government regulation, taxes, and subsidies.
Why is it important to consider externalities when making economic decisions?
**Answer:** It is important to consider externalities when making economic decisions because they can have a significant impact on the overall efficiency and welfare of society.