Externality – Indian Economy Notes for UPSC

Externality – Indian Economy Notes for UPSC An externality is a situation where the actions of an individual, firm, or government affect third parties who are not directly involved in the activity. These effects can be either positive or negative and are not reflected in the market price of goods or services. Externalities are a critical concept in economics , particularly in the context of market failure, where the market does not allocate resources efficiently. Types of Externalities Positive Externalities These occur when the actions of individuals or firms create benefits for others without those benefiting parties having to pay for them. Examples: A farmer planting trees on their land absorbs carbon dioxide, improving air quality for the surrounding community. The farmer's action benefits others (third parties) who did not contribute to the tree-planting effort. Negative Externalities These arise when the actions of individuals or firms impose costs on others. Examples: A factory emitti…