What are Externalities? Types, Examples - UPSC Notes

🔹 What are Externalities? An externality is a side effect of an activity that affects someone else who is not directly involved in it. If it hurts others , it’s a negative externality (bad side effect). 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: The smoker enjoys it (private benefit). But people nearby breathe smoke and get health problems (external cost). 🎯 Result : Good for the smoker Bad for others nearby 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 : They protect themselves from illness (private benefit). They also prevent spreading disease to others (exter…