Externalities

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

Positive externalities improve the welfare of an individual or a 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[Page 148] without incurring costs. Most positive externalities are relatively trivial. However, network externalities, which reflect the rising utility of systems such as telephone networks and the Internet, are important; the more people use a system, the greater the value it has to each user.

However, negative externalities, which diminish the welfare of a person or 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 annihilates a homeowner's view, the affected party suffers a negative externality. More general cases involve the creation of air and water pollution, acid rain, noise pollution, and 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; thus, they are 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. As another example, a logging company may deprive a neighborhood of shade. In this case and similar ones, the social costs are greater than the sum of individual costs and lead to the overproduction of goods with high social costs. These often are seen as violations of individual rights and lead to serious ethical and political problems. Thus, negative externalities are 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 that are unevenly distributed. The presence of a sports stadium, for example, may generate a field of noise that negatively affects local residents. Negative externalities 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).