Economics 101: Externalities In Economics
[This is part of the series: The Complete Guide To Economics 101.]
Economics tries to account for what is both seen and unseen.
Take costs, for instance.
The seen cost of attending college is the tuition, room, board, transportation, entertainment, etc.
The unseen cost, or opportunity cost in this case, is the fact that you forgo income by not working.
Another unseen cost in economics is called an externality.
An economic externality is a cost or benefit that influences a third party.
What are some examples?
- A negative externality of one not changing their socks but once a week is a smell the rest of us must endure.
- A positive externality of one maintaining their property is that the neighbors’ property value may rise.
- A negative externality of factory production might be the increase in pollution some areas must endure.
- A positive externality of pursuing your own riches may be jobs that you provide for others.
In the end, negative externalities can be thought of as an issue of property rights.
If someone owned the air, they might address people about changing their socks and the pollution they produce.
Externalities can also prove difficult to calculate.