Externality: Unveiling the Unseen Forces, Mastering the Art of Externalities

By Fouad Sabry

What is Externality

An externality, sometimes known as an external cost, is a cost or benefit that flows to an uninvolved third party as a result of the actions of another party. In economics, an externality is also referred to as an external cost. Externalities are components that are not priced and are involved in either consumer or producer market transactions. They can be thought of as unpriced components. One such example is the pollution of the air caused by motor vehicles. The makers of motorized transportation and the people who use it are not responsible for paying the cost of air pollution to society. This cost is borne by the rest of society. A further illustration of this is the contamination of water by mills and factories. All consumers of water are made worse off as a result of pollution, but the market does not pay them for the damage that they have suffered. In the context of a market, a positive externality occurs when the consumption of an individual contributes to the improvement of the well-being of other individuals, but the individual does not charge the third party for the benefit. Additionally, the third party is receiving a product at no cost to them. An illustration of this would be the flat that is located over a bakery and receives some free heat during the cold months. The bakery does not get any compensation from the residents of the flat for the advantage that they receive.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Externality

Chapter 2: Ronald Coase

Chapter 3: Emissions trading

Chapter 4: Environmental economics

Chapter 5: Free-rider problem

Chapter 6: Market failure

Chapter 7: Factor price equalization

Chapter 8: Arthur Cecil Pigou

Chapter 9: Economies of agglomeration

Chapter 10: Marginal cost

Chapter 11: Coase theorem

Chapter 12: Pigouvian tax

Chapter 13: Free-market environmentalism

Chapter 14: Social cost

Chapter 15: Shadow price

Chapter 16: The Problem of Social Cost

Chapter 17: Spillover (economics)

Chapter 18: Public economics

Chapter 19: Environmentally honest market system

Chapter 20: Federal Reserve

Chapter 21: Efficient Voter Rule

(II) Answering the public top questions about externality.

(III) Real world examples for the usage of externality in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Externality.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Apr 7, 2024

Book preview

Chapter 1: Externality

An externality or external cost is an indirect cost or benefit to an uninvolved third party that results from the activity of another party (or parties). Externalities are unpriced goods involved in consumer or producer market transactions. Transportation-related air pollution is one example. The cost of air pollution to society is not borne by either producers or consumers of motorized transportation. The contamination of water by mills and factories is another example. All consumers are harmed by pollution, but the market does not compensate them for this loss. A positive externality occurs when an individual's consumption in a market enhances the well-being of others without the individual charging the third party for the benefit. Essentially, the third party receives a free product. This could be illustrated by the apartment above a bakery that enjoys the aroma of freshly baked pastries every morning. The apartment's residents do not compensate the bakery for this benefit. Typically, this is accomplished by imposing taxes on the externality's producers. This is typically done similar to a quote, where no tax is imposed until the externality reaches a certain threshold, at which point a very high tax is imposed. Nonetheless, because regulators do not always have complete information about the externality, it can be challenging to impose the appropriate tax. As soon as the externality is internalized via taxation, the competitive equilibrium is now Pareto