Externalities

Broadly speaking, externalities (also known as “spillovers” or “neighborhood effects”) refer to “uncompensated welfare impacts,” that is, the actions and events of one party or person that affect the welfare (positively or negatively) of another without some type of remuneration. These arise when a decision maker does not reap [Page 1069]all the rewards or bear all the costs of his or her actions and can occur in both the production and the consumption of goods and services.

Positive externalities improve the welfare of an individual or group without a cost. For example, if one's neighbor has an attractive garden or plays music that one enjoys, the receiving party derives benefits without paying the costs. Most positive externalities are relatively trivial. However, network externalities, which reflect the rising utility of systems such as telephone networks or the Internet, are important: The more users use a system, the greater the value it has to each user.

Negative externalities, however, which diminish the welfare of a person or a group, are a different story. Examples of negative externalities include the reduction in real estate values created by the location nearby of an unwanted land use (e.g., a toxic waste plant). If a developer erects a high rise that blocks a home owner's view, the latter suffers a negative externality. More general cases involve the creation of air and water pollution, acid rain, noise pollution, or traffic congestion. Because the producers of negative externalities do not have an incentive to worry about the impacts of their actions on others, they generate social and market inefficiencies.

Negative externalities occur when the social costs of an action are not captured in the private costs in the form of the market price and are thus a prime example of market failure. For example, the true costs of operating an automobile include its impacts on highways, the environment, and public health, few or none of which are included in the price of gasoline or car insurance. A logging company may deprive a neighborhood of shade. In this case, and similar ones, the social costs are greater than the sum of the individual costs and lead to the overproduction of goods with high social costs. These are often seen as violations of individual rights and lead to serious ethical and political problems. Negative externalities are thus commonly cited as necessary instances of government intervention, such as zoning ordinances, health and safety regulations, and environmental conservation.

Geographers study the spatial location, frequency, and magnitude of negative externalities, which are unevenly distributed. The presence of a sports stadium, for example, may generate a field of noise that affects local residents negatively. These factors are particularly important in the analysis of transportation (e.g., congestion), land use (e.g., rural-to-urban land conversion), and natural resource conservation (e.g, hydroelectric dams and their impacts).