Economics
Positive Externalities
Positive externalities refer to the benefits that are enjoyed by third parties as a result of an economic transaction or activity. These benefits are not accounted for in the market price and are often underproduced by the market. Examples include education, healthcare, and environmental conservation. Government intervention, such as subsidies or public provision, is often used to address positive externalities.
Written by Perlego with AI-assistance
Related key terms
1 of 5
12 Key excerpts on "Positive Externalities"
eBook - PDF- Kumar, A(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
Chapter 3 Externalities Meaning, Sources and Types Externalities arise when certain actions of producers or consumers have unintended external (indirect) effects on other producers or/and consumers. Externalities may be positive or negative. Positive externality arises when an action by an individual or a group confers benefits to others. A technological spillover is a positive externality and it occurs when a firm’s invention not only benefits the firm but also enters into the society’s pool of technological knowledge and benefits the society as a whole. Negative externalities arise when an action by an individual or group produces harmful effects on others. Pollution is a negative externality. When a factory discharges its untreated effluents in a river, the river is polluted and consumers of the river water bear costs in the form of health costs or/and water purification costs. In an activity generating positive externality, social benefit is higher than private benefit and in an activity generating negative externality, social cost is higher than private cost. Thus, in the presence of externalities, social benefits (costs) and private benefits (costs) differ. The divergence between private benefits (costs) and social benefits (costs) results in inefficiency in resource allocation. Producers of externalities do not have any incentive to take into account the effects of their actions on others. In a competitive market economy, private optimum output is determined at the point where marginal private cost equals price. When a positive externality occurs, the marginal social benefit will be higher than the marginal private benefit (price) and hence the private optimal output will be lower than the social optimal output. When a negative externality occurs the marginal social cost will be higher than the marginal private cost (price) and This ebook is exclusively for this university only. Cannot be resold/distributed.
eBook - PDFProduction, Growth, and the Environment
An Economic Approach
- William L. Weber(Author)
- 2014(Publication Date)
- CRC Press(Publisher)
Accounting for these spillovers or externalities is the subject of this chapter. 8.2 Trade with Spillover Costs and Benefits Voluntary trade between two people tends to make both parties better off, or, at the least, leaves no one worse off. If someone were made worse off, they would not voluntarily agree to the trade. In voluntary market exchanges the two parties that trade compensate each other. When Sid goes to the gas station and puts ten gallons of gasoline in his tank his action makes the gas station owner worse off because now the owner has ten fewer gallons of gas in her storage tank. But, Sid compensates the owner by paying her $3.50/gallon. Both Sid and the gas station owner are made better off by the exchange. Sid reveals that he would rather have ten gallons and less money in his pocket and the gas station owner reveals that she would rather have the money and ten fewer gallons of gasoline. An externality or spillover or third-party effect occurs when one economic agent’s actions affects the well-being of others and no compensation is made. Continuing with the gasoline example, no externality occurs until Sid starts his car and pulls away from the gas station. However, as soon as Sid continues his journey, the gasoline is burned and generates pollution. If Sid does not compensate others for the pollution he generates, an externality occurs. Externalities can be either beneficial or harmful. Positive Externalities ex-tend benefits to third parties while negative externalities impose costs on third parties. When Positive Externalities exist people produce and consume too lit-tle of the good or service in private market transactions. In contrast, when there are negative (harmful) externalities imposed on a third party due to pro- Externalities and Common Property Resources 165 duction and consumption private individuals acting in their own self-interest will tend to overproduce and overconsume goods and services.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
C H E C K P O I N T How specifically has the federal government regulated air, water, and land pollution? 17-4 Positive Externalities To this point, we have considered only negative externalities. But externalities are some- times positive, or beneficial. Positive Externalities occur when consumption or produc- tion benefits other consumers or other firms. For example, people who get inoculated against a contagious disease reduce their own likelihood of contracting the disease (the personal benefit), but they also reduce the risk of transmitting the disease to others Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 17 Externalities and the Environment 393 (the external benefit). Parents who don’t get their children vaccinated risk triggering an epidemic, so the vaccination decision is not simply a private matter. For example, the Centers for Disease Control and Prevention recently reported an outbreak of measles in 17 states because some children were not vaccinated. 24 Another positive externality results from education. Society as a whole receives exter- nal benefits from education because those with more education become better citizens, can read road signs, are better able to support themselves and their families, and are less likely to require public assistance or to resort to violent crime for income. Researchers found that more schooling significantly reduces the probability of incarceration. 25 Also, the higher the minimum dropout age for school, the lower the arrest rate for property and violent crimes among 16-to-18-year-olds.
eBook - PDF- John Leach(Author)
- 2003(Publication Date)
- Cambridge University Press(Publisher)
Externalities An externality is a situation in which the behaviour of a person or firm affects the welfare of another person, or the profitability of another firm, without appropriate monetary compensation occurring. 1 An externality is positive if some agent’s behaviour makes another agent better off, and it is negative if that behaviour makes another agent worse off. Once you start looking, externalities are everywhere: • Smokers like their nicotine “hit” but nearby non-smokers would prefer that they didn’t get it. • Someone playing music on a beach is emitting an externality – positive if you like the music and negative if you don’t. • Industrial emissions lower air and water quality, damaging our health and that of other species, and imposing additional costs on other firms who need clean air and water as part of their production processes. • You would be happier if your neighbours were avid gardeners than you would be if they put their old clunkers up on blocks on their front lawns. • You are better off if you are literate, but so are all the other people who have to deal with you, because they can communicate with you in writing. • Inoculation protects you against communicable diseases. However, many diseases require a large, dense population of susceptible people before they can establish themselves. Since each inoculation reduces the population of susceptible people, it also protects (to some degree) people who choose not to be inoculated. • Trails opened to mountain bikers typically widen and turn to mud, and tree falls become more numerous because of damage to their root systems. The mountain biker is just looking for a thrilling ride, but leaves behind imperceptible damage which is devastating in its cumulative impact. • Each car entering the freeway system at rush hour slows the others down (again, almost imperceptibly) with the result that the same trip can take several times longer during rush hour than it would during slack times.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
C H E C K P O I N T How specifically has the federal government regulated air, water, and land pollution? 17-4 Positive Externalities To this point, we have considered only negative externalities. But externalities are some-times positive, or beneficial. Positive Externalities occur when consumption or produc-tion benefits other consumers or other firms. For example, people who get inoculated against a contagious disease reduce their own likelihood of contracting the disease (the personal benefit), but they also reduce the risk of transmitting the disease to others Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 17 Externalities and the Environment 393 (the external benefit). Parents who don’t get their children vaccinated risk triggering an epidemic, so the vaccination decision is not simply a private matter. For example, the Centers for Disease Control and Prevention recently reported an outbreak of measles in 17 states because some children were not vaccinated. 24 Another positive externality results from education. Society as a whole receives exter-nal benefits from education because those with more education become better citizens, can read road signs, are better able to support themselves and their families, and are less likely to require public assistance or to resort to violent crime for income. Researchers found that more schooling significantly reduces the probability of incarceration. 25 Also, the higher the minimum dropout age for school, the lower the arrest rate for property and violent crimes among 16-to-18-year-olds.
eBook - PDFHow to Regulate
A Guide for Policymakers
- Thomas A. Lambert(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
You don’t make another patio sale for the rest of the day. You, my friend, have been the victim and the beneficiary of “externalities.” An externality occurs when some of the cost or benefit of an activity is experi- enced by someone “external” to the activity. The annoyance and business losses you suffered because of Brookside’s raucous pool party were negative 22 externalities – cost spillovers. So was your rent increase occasioned by the opening of the Google facility (though, as we’ll see, that was a special type of negative externality that is less troubling). The extra business you enjoyed because of your neighbor’s new planters constituted a positive externality, a benefit spillover. Your neighbor bore the full cost of providing those planters, but could not capture all the benefit – some trickled your way. symptoms/disease With most of the market failures we will consider, the adverse effects (the symptoms) and the cause of those effects (the disease) are distinct concepts. For example, with information asymmetry, the subject of Chapter 8, the primary symptom – an absence of high-quality products or services of a certain sort – is quite different than the disease – the fact that the sellers of those products and services have far more information about quality than do potential buyers. We usually have to connect a few dots to see exactly how a market failure occasions the adverse effects that result. With an externality, though, one symptom is closely related to the disease. When the externality is negative, there is an apparent injustice to the party bearing the spilled-over cost. It simply wasn’t fair, for example, for Brookside to disrupt your business with its loud pool party. When the externality is positive, the injustice is suffered by the party that created the benefit but couldn’t fully capture it. It wasn’t fair to your cafe ´ neighbor, for instance, that you should benefit from its planters even though you didn’t contribute to their creation.
eBook - ePubEnvironmental and Natural Resources Economics
Theory, Policy, and the Sustainable Society
- Steven Hackett, Sahan T. M. Dissanayake(Authors)
- 2014(Publication Date)
- Routledge(Publisher)
Chapter 7 .Summary
- Positive Externalities are unpaid-for benefits to society generated as a by-product of production and exchange. When there are important Positive Externalities, market demand based on the private benefits of buyers understates the full social benefits of the good or service generating the external benefit. Consequently, too little of the good or service generating the positive externality is produced in otherwise well-functioning competitive markets. Subsidies represent a form of policy intervention that can enhance market efficiency by internalizing the positive externality. Positive Externalities can also affect the supply curve, such as when there are knowledge spillover externalities.
- While the legal system is designed to protect property, open-access and public trust resources were not traditionally protected under common law from pollution harms and thus remain subject to degradation. The legal system does not function perfectly, of course, and so pollution harms to people, their homes, and other valuable objects that are property do regularly occur. One problem is in determining the source of the pollution when there may be very large numbers of emitters, as is the case with automobile exhaust.
- Negative externalities are uncompensated damage costs borne by members of society. These negative externalities are generated as a by-product of production and exchange. Profit-maximizing firms have an incentive to transform private costs into negative externalities (external costs) in the absence of regulation or reputation effects. When there are important negative externalities, market supply based on private costs to sellers is too large, leading to too much of the good or service generating the negative externalities being produced in otherwise well-functioning competitive markets. Pigouvian taxes represent a form of policy intervention that can enhance market efficiency.
eBook - PDFWelfare Economics
Towards a More Complete Analysis
- Y. Ng(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
7 Externality It was noted in Chapter 2 that an equilibrium situation of a perfectly competitive market economy is Pareto optimal under certain conditions. One of these conditions is the absence of (unaccounted for) external effects. However external effects are pervasive. External effects in the form of envir- onmental disruption have attracted both academic and public attention for decades (see for example Papandreou, 1994; Stavins, 2000). This chapter considers how external effects can cause non-optimality, and how this can be alleviated. But first we shall discuss the concept and classification of external effects. 7.1 The concept and classification of externalities Obviously, for an external effect to be present there must first be an effect. Some party, K (the affecting party) must produce an effect on some other party, J (the affected party). The effect must not just be present but must also have a positive or negative welfare significance. For example if water from my neighbour’s garden hose flows into my garden, a physical effect is there. But if I do not care about it one way or the other, it cannot be said that an externality exists. Second, the affecting party is usually a person, a group of persons or something that is under the control of persons (animals, institu- tions and so on). It is possible to speak of the external effects of, say, wild animals and use this to justify certain measures against them. But the usual methods of tax/subsidy, bargaining and so on will not be applicable. The affected party is also usually a person/group of persons or something owned by persons. However if the welfare of non-human beings, such as animals, enters into our objective function, then it is quite logical to include them as possibly affected parties. The mere presence of a welfare-relevant effect by one party on another does not necessarily constitute an externality; additional conditions are needed for the effect to be considered external.
eBook - PDFEnvironmental Economics
Theory and Policy
- Alfred Endres, Iain L. Fraser(Authors)
- 2010(Publication Date)
- Cambridge University Press(Publisher)
To produce it, they use only production factors bought on the factor markets. In the model for good x just briefly sketched, there are no relationships other than market relations . This fact has to be seen as a drastic simplification, given the actual circumstances of reality. In economics, we call interdependencies between individuals mediated through markets “internal effects.” An “externality” arises, in contrast, where the utility position (for firms, profit position) of an individual depends directly (i.e., without mediation through the market mechanism) on an activity controlled by another individual. Taking this definition as a basis, it will immediately be found that every individual’s life world contains a thick jungle of externalities. Not all these effects are relevant in our 27 Of course, various divergences between a simple model and reality may interact. Taking account of this, although important to analysis, complicates it considerably. The consequences of simul-taneous occurrence of externalities and market power are discussed in part four, chapter B. An example of the internalization of externalities with asymmetrical information is discussed in part two, section B.IV, in the context of environmental liability insurance. A similar interaction is cov-ered in part four, chapter C, in connection with internalization negotiations with asymmetrical information. 16 Environmental Economics context, and there is by no means consensus in society about which ones are at issue. One example of an externality on which consensus might be possible is dust emitted by a firm. 28 A monetary evaluation of the externality shows the external costs. 29 The total costs caused by the production, the “social costs,” result from the sum of the private and external costs. To explain the effects of an externality on the social optimality of a competitive equilibrium, we return to our previous example of the production of good x .
eBook - PDF- Michael Albert, Robin Hahnel(Authors)
- 2017(Publication Date)
- Princeton University Press(Publisher)
236 The Prevalence of Externalities and Public Goods 2. There is no qualitative difference between public goods and exter- nalities and no reason to treat them differently at a theoretical level. Public goods or bads are simply externalities whose effects are more pervasive than what convention has chosen to call an externality. Externalities are simply public goods or bads whose effects are too circumscribed to merit the label public. 3. The primary intentions of the economic actor whose decision generates external effects for others and the private or public status of that actor, are of no theoretical consequence as far as social efficiency is concerned. 4. The issue is not the characteristics of goods but the characteristics of markets, since it is the market/propertyrightsystem that establishes who gets to make what decisions. How is it that "traditional solutions" that involve a government with coercive powers might improve matters? And why have economists con- cluded that while "traditional solutions" might improve upon market allocation and voluntary association, they are all, to some extent, inevitably flawed? Here we will uncover a very peculiar lack of rigor in the analysis by traditional welfare theorists. Suppose we substitute a government for the market-property-right system of allocating resources in all cases where external effects exist and instruct the government to do so in a socially efficient manner. The goverment must decide two things: how much of each activity that generates effects external to the market decision-making process should occur, and how much to assess each citizen to defray whatever costs may arise from implementing its first decision. In language more familiar to students of public finance, the goverment must make (1) a decision about expenditures—how much to spend on the provision of different public goods, and (2) a decision about taxation—how to collect the revenues necessary to cover the expenditures.
eBook - PDFMicroeconomics
Theory and Applications
- Edgar K. Browning, Mark A. Zupan(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
APPLICATION 20.4 4 This application is based on Richard A. Epstein, “BP Doesn’t Deserve a Liability Cap,” Wall Street Journal, June 16, 2010, p. A21. 520 Chapter Twenty • Public Goods and Externalities • External Benefits External benefits can be analyzed in a similar fashion to external costs. Let’s suppose that the consumption of some product generates external benefits—that is, people other than the direct consumers of the product benefit from its consumption. Some economists have argued that education may be such a product if a better-educated citizen not only makes himself or herself better off in the process but also improves the society of which he or she is a part. In Figure 20.3, the competitive supply and demand curves where demand identifies the private marginal benefit are S and MB P . The private marginal benefit curve, MB P , reflects the marginal benefits of the good only to the consumers of the product, and its intersection with the supply curve determines the market equilibrium with an output of Q 1 and a price of $10. The marginal external benefit curve, MB E , shows the external benefits per unit of con- sumption. This curve is derived by vertically summing the demands of people other than the immediate consumers of the product. Vertical summation is used because people other than direct consumers simultaneously receive benefits—that is, the benefits are nonrival. When external benefits exist, the competitive output is inefficient. At Q 1 , the marginal benefit to consumers of another unit of the product is $10, as given by the height of the MB P curve. If another unit is consumed, people other than the direct consumers also receive a marginal benefit valued at $3, as shown by the height of MB E at Q 1 . Thus, the combined marginal benefit for all those affected by consumption of another unit is $13, and this amount exceeds the $10 marginal cost of producing an additional unit.
eBook - PDFEnvironment
An Interdisciplinary Anthology
- Eugene Jolas, Andreas Kramer, Rainer Rumold(Authors)
- 2008(Publication Date)
- Yale University Press(Publisher)
In the case of irrigation water, the private cost of both the commodity water and the resource water is con-stant at zero, while the social cost of both is positive and rising. Similarly, the cost to the private sector of using the environment (water, land, and air) for waste dis-posal is zero, while the cost to the society is positive and rising. Rapid deforesta-tion and slow reforestation, even in securely owned forest land, is partly the con-sequence of the failure of the market to price forest products to capture the effects on watersheds, wildlife, and other nonmarketed services of the forest . . . . Spillover Effects or Externalities A major factor that drives a wedge between private and social valuation of re-sources and leads to inefficient pricing is the presence of external costs or spillover effects known as externalities. An externality is an effect of one firm’s or individ-ual’s actions on other firms or individuals who are not parties in those actions. Ex-ternalities may be positive or negative. A positive externality, for example, is the benefit that upstream forest owners provide to downstream farmers in the form of a steady water supply made possible by a forested watershed. It is to the society’s (and the farmer’s) benefit that more of such Positive Externalities are provided, but since the forest owners receive no payment for their watershed service, they have no incentive to provide more of this service by logging less and planting more. The result is that more logging and less planting than is socially optimal takes place. From another perspective, logging has negative externalities for downstream activities such as farming, irrigation, transport, and industry in the form of flooding, sedimentation, and irregular water supply.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
