Externalities

Though largely unknown in the wider public discourse, externalities represent a key concept in economics, particularly as it concerns the environment. At its core, the term externalities captures a simple, basic idea: virtually every market transaction accrues either benefits or costs that are not directly involved in the initial transaction. Another way of stating this is that neither “positive externalities” nor “negative externalities” are “internal” to the transaction (they produce what economists call a “spillover effect”). A simple example for a beneficial externality: a consumer pays for, and receives, a flu shot. When they subsequently stay healthy, everyone around them benefits (even though they did not pay for the shot, nor in any other way were part of the original transaction). A simple example for ...