What are Externalities?
An externality arises when a person engages in an activity that influences the well-being of a third party who neither pays nor receives any compensation for that effect. The impact may be adverse - negative externality, or beneficial - positive externality.
Because buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, market equilibrium is not efficient when there are externalities. That is, the equilibrium fails to maximise the total benefit to society as a whole.
In this way, externalities are a source of ineffiency which results in a market failure.
Because buyers and sellers neglect the external effects of their actions when deciding how much to demand or supply, market equilibrium is not efficient when there are externalities. That is, the equilibrium fails to maximise the total benefit to society as a whole.
In this way, externalities are a source of ineffiency which results in a market failure.
Examples
Here are some examples of externalities. Are they positive externalities or negative externalities?
1. A beekeeper keeping bees for their honey results in
the pollination of surrounding crops by the bees.
2. Antibiotic overuse contributes to antimicrobial
resistance, reducing the future effectiveness of antibiotics.
3. A man keeping an attractive garden in front of
his house causes property values for his neighbours
to rise.
4. Crime in a neighborhood increases after the opening
of a new off-licence in the area.
1. A beekeeper keeping bees for their honey results in
the pollination of surrounding crops by the bees.
2. Antibiotic overuse contributes to antimicrobial
resistance, reducing the future effectiveness of antibiotics.
3. A man keeping an attractive garden in front of
his house causes property values for his neighbours
to rise.
4. Crime in a neighborhood increases after the opening
of a new off-licence in the area.