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What is Positive and Negative Externalities?
Let us first define what an externality is.
An externality occurs when a 3rd party (someone not involved in a transaction) is affected by the actions of the transaction. An externality happens when only private costs and benefits are considered and social costs and benefits are ignored.
Therefore, a positive externality is one where the social benefit is more than social cost and a negative externality occurs when the social costs outweigh benefits. I know, so technical right? Not really, think of social costs and benefits as ALL the costs and benefits of an action, that is how the action not only affects the individual BUT SOCIETY ON A WHOLE. When social benefits and costs are not equal, deadweight loss occurs, and we have externalities. Can you think of any examples of each?
Externalities are things that affect a given subject without being directly affiliated with a given object. There are two types of externalities that can take place and can either aid or further hinder a subjects' progress. For example a negative example would be that you were late to your class due to the fact that there was a traffic jam on your way to school. Now the traffic jam in this case is your negative externality, causing you to be late to your class. An Example of a positive externality would be that the fact that you got a good night's sleep before your exam in class. Now the sleep was the reason that you were able to do well in your exam and helped you by making you be more energetic.
Why study Positive and Negative Externalities?
Positive and negative externalities matter because the real world does not conform to a simple supply and demand curve. The world is a complex place, and nearly every phenomenon has multiple causes and multiple effects besides the supply and demand of those directly involved, which economists must acknowledge.