🔹 What are Externalities?
An externality is a side effect of an activity that affects someone else who is not directly involved in it.
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If it hurts others, it’s a negative externality (bad side effect).
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If it helps others, it’s a positive externality (good side effect).
🔸 TYPES OF EXTERNALITIES with SIMPLE EXAMPLES:
1. Negative Consumption Externality
🔹 Harm caused by people while using something.
📌 Example:
When a person smokes a cigarette in public:
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The smoker enjoys it (private benefit).
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But people nearby breathe smoke and get health problems (external cost).
🎯 Result:
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Good for the smoker
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Bad for others nearby
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Society suffers = Negative Consumption Externality
🛠️ Solution:
Government can impose taxes on cigarettes (called Pigouvian taxes) to reduce smoking.
2. Positive Consumption Externality
🔹 Good effects for others when someone uses a service.
📌 Example:
When someone gets vaccinated:
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They protect themselves from illness (private benefit).
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They also prevent spreading disease to others (external benefit).
🎯 Result:
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Good for the individual
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Also good for society
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Society benefits = Positive Consumption Externality
🛠️ Solution:
Government gives subsidies (financial help) to reduce the cost of vaccines or education.
3. Negative Production Externality
🔹 Harm caused by a business while making something.
📌 Example:
A factory produces cement:
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They make profit (private benefit).
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But they release pollution, which causes diseases and damages nature (external cost).
🎯 Result:
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Profit for the company
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Loss for society (pollution, health problems)
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= Negative Production Externality
🛠️ Solution:
Government puts a Pigouvian tax on the polluting factory to reduce production.
4. Positive Production Externality
🔹 Good effects from business activities that help others too.
📌 Example:
A company develops a new technology:
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The company earns profit (private benefit).
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Other companies and people also use that technology and benefit (external benefit).
🎯 Result:
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Good for the company
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Also good for society (more innovation)
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= Positive Production Externality
🛠️ Solution:
Government may give subsidies or fund research to encourage more innovation.
📊 Summary Table:
| Type | Simple Example | Effect on Society | Government Action |
|---|---|---|---|
| Negative Consumption | Smoking in public | Harm to others | Tax on cigarettes |
| Positive Consumption | Education / Vaccination | Benefit to others | Subsidies / Free services |
| Negative Production | Factory pollution | Environmental harm | Pollution tax |
| Positive Production | R&D or new technology | Innovation benefits all | Research subsidies/funding |