Economics Externalities Questions Medium
Positive externalities refer to the beneficial effects that an economic activity or decision has on third parties who are not directly involved in the transaction. These external benefits are often not taken into account by the individuals or firms making the decision. For example, when a person gets vaccinated against a contagious disease, not only does it protect them from getting sick, but it also reduces the risk of spreading the disease to others in the community.
On the other hand, negative externalities occur when the actions of individuals or firms impose costs on third parties who are not involved in the transaction. These external costs are also not considered by the decision-makers. For instance, when a factory releases pollutants into the air or water, it not only harms the environment but also affects the health and well-being of nearby residents.
The key difference between positive and negative externalities lies in the direction of the impact on third parties. Positive externalities result in benefits to others, while negative externalities lead to costs or harm to others. Both types of externalities can have significant implications for economic efficiency and the allocation of resources.