Question

What is an externality?

Short answer

An externality is a cost or benefit that affects a third party not directly involved in a transaction or production of a good or service. Positive externalities include education and vaccinations, as they benefit not only the individual but the society as a whole. Negative externalities, such as air and noise pollution, cause harm to those who did not participate in the production or transaction, affecting their health and wellbeing.

Step-by-step solution

Definition

An externality is a cost or benefit that affects a third party not directly involved in a transaction or production of a good or service. Externalities can be both positive and negative, depending on whether the third party experiences a benefit or cost as a result of the transaction or production.

Examples of Positive Externalities

1. Education: When an individual gets an education, it not only benefits the person but also provides benefits to the society as a whole. A more educated workforce can lead to increased productivity, innovation, and reduced crime rates. 2. Vaccinations: When people get vaccinated, they not only protect themselves from getting sick but also reduce the chances of others getting infected, creating a healthier community.

Examples of Negative Externalities

1. Air pollution: When a factory produces goods, it also generates emissions that pollute the air. This pollution affects those living near the factory who did not participate in the production or purchase of the goods, causing respiratory or other health problems. 2. Noise pollution: When a nightclub or loud event takes place in a residential area, it can cause noise pollution that disturbs the residents who didn't choose to attend the event or live near the nightclub. This disrupts their sleep, affecting their wellbeing and productivity.