Negative Externalities: Definition, Examples, Graph

When it comes to the production of goods and services there can be both positive and negative externalities. A positive externality is an effect of production that benefits someone other than the producer or consumer of the good or service. Now negative externalities are the opposite. They refer to a cost or negative effect of production that is experienced by someone other than the producer or consumer of the good or service.

In this article, we will be focusing on the topic of negative externalities. We will discuss what they are, some real-world examples, and how society can correct them.

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Table of Contents

What are Negative Externalities

Negative externalities are costs that are incurred by a third party as a result of an economic transaction. In other words, someone other than the producer or consumer of the good or service is negatively impacted by it.

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There are three main types of negative externalities

Pollution: This is the release of harmful or unwanted substances into the environment such as air, water, or soil. The pollutants can cause damage to the environment, public health, and property.
Traffic congestion: This is when there are too many vehicles on the road and not enough space to accommodate them. This can lead to traffic jams, increased pollution, and loss of time and money.
Noise pollution: This is the excessive or unwanted sound that is created by human activity. It can be very annoying and lead to health problems such as stress, high blood pressure, and hearing loss.

Real-life examples of a negative externality

One example of a negative externality is the use of plastic bags. When people use a plastic bag, it often ends up in the environment. This can be harmful to the environment as it can take centuries for plastic bags to decompose. It can also harm wildlife as they can become entangled in the bags or mistakenly eat them.

Another example would be the use of pesticides. When farmers use pesticides on their crops, they can often drift into the surrounding environment and impact other farms or homes. Pesticides can contaminate the soil and water, which can lead to health problems for people and animals.

How to correct negative externalities

There are a few ways that society can correct negative externalities

Regulation: This is when the government intervenes and puts in place rules and regulations to limit or prohibit the activities that are causing negative externalities.
Taxes: This is when the government imposes taxes on the activities that are causing the negative externalities. This is done to discourage people from engaging in those activities.
Subsidies: This is when the government provides financial assistance to people or businesses that are affected by the negative externalities.
Education: This is when the government educates people about the negative externalities and how they can be avoided.
Liability: This is when the party that is causing the negative externality is held liable for the damage that they are causing. They may be required to pay damages to those that have been impacted by their actions.

Conclusion

So there you have it. Now we know what negative externalities are and some examples of them. As we are moving towards a more global society, it is important to be aware of the negative externalities that can occur as a result of our actions. We need to be proactive in finding ways to correct them so that we can all live in harmony. Thanks for reading.