Economic externalities are effects from an economic activity affecting other people’s wellbeing – usually elsewhere and subsequent to the activity itself. 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. For example, the emission of harmful exhaust gases from vehicle use.
  • A positive externality is when the action or decision provides a social benefit. For example, returning pasture to forestry. Institutions make use of, manage, or capture beneficial externalities where possible or viable. Organisations, such as a hotel in a particularly attractive location, can provide and market services based on the externalities.
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