Externalities

Economic externalities are effects from an economic activity affecting other people’s wellbeing usually elsewhere and subsequent to the activity. The effects occur later through physical processes e.g. air and sea pollution are spread wider than the original activity. Externalities are all pervasive and have cumulative impacts on people, animals, vegetation, buildings and other infrastructure, now and in the future. They can be negative or positive. A negative externality is when the cost to a person or institution of their activity or decision is less than the social cost taking account of the impacts on others. The emission of harmful exhaust gases from vehicle use is a case in point. A positive externality is when the action or decision provides a social benefit, e.g. returning pasture to forestry. Institutions make use of, or manage, or capture beneficial externalities if it is either possible or viable, in the sense that organisations can provide and market services based on the externalities (e.g. a hotel in a particularly attractive location).

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