Externalities: Types and Effects
This page introduces the concept of externalities in economics, explaining both positive and negative externalities in consumption and production.
Positive Externalities
Positive externalities occur when the actions of consumers or producers benefit third parties.
Example: Healthcare, education, and exercise are examples of positive consumption externalities.
Highlight: Positive externalities often lead to under-consumption or under-production, resulting in a misallocation of resources.
Positive Production Externalities
These occur when the actions of producers benefit third parties.
Example: Research and Development R&D can be a positive production externality, as firms may copy expensive technology without going through costly R&D themselves.
Negative Externalities
Negative externalities arise when the actions of consumers or producers impose costs on third parties.
Example: Smoking is a classic example of a negative consumption externality.
Highlight: Negative externalities typically result in over-consumption or over-production, leading to resource misallocation.
Negative Production Externalities
These occur when production activities impose costs on third parties.
Example: Air pollution, resource depletion, and deforestation are examples of negative production externalities.
Vocabulary: MPC MarginalPrivateCost, MPB MarginalPrivateBenefit, MSC MarginalSocialCost, MSB MarginalSocialBenefit
