examples of externalities

What are Externalities?

An externality is a cost or benefit that affects someone not directly involved in the production or consumption of a good, and which occurs without compensation. Externalities are in effect a type of market failure. When an externality exists, either too much or too little is either produced or consumed than the market price dictates.

There are Positive and Negative externalities, external cost or benefit, and as a subsection of each there are producer and consumer externalities. Here is an example of each:

Positive Producer Externality/ external benefit in production
Education creates a positive externality because more educated people are less likely to engage in violent crime, which makes everyone in the community, even people who are not well educated, better off.

Positive Consumer Externality/ external benefit in consumption
An individual planting an attractive garden in front of his house may provide benefits to others living in the area, and even financial benefits in the form of increased property values for all property owners.

Negative Producer Externality/ external cost in production
The harvesting by one fishing company in the ocean depletes the stock of available fish for the other companies and overfishing may be the result. This is an example of a common property resource, sometimes referred to as the Tragedy of the commons.

Negative Consumer Externality/ external cost in consumption
An example would be when someone throws away the wrapping to a present. The wrapping is then eaten by a farm animal and the animal dies

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