Importance of Externality

Importance of Externality An externality is a cost or a benefit that arises form production that falls on someone other than the producer; or a cost or a benefit that arises from consumption that falls on someone other than the consumer. (1) First, the importance of studying externality comes from its universality. Externality exists so widely that everyone involved in the market cannot escape its influence. In addition, according to the notion of externality, the existence of externality means resources cannot reach the most superior disposition. Thus, externality becomes one of the most important economic problems. An externality can be a positive externality or a negative externality, so the importance of externality should include: the benefit which comes from the positive externality and the enlightenment which was given by the negative externality. A positive externality is a production or consumption activity that creates an external benefit. (2)A positive externality exists when an individual or firm making a decision does not receive the full benefit of the decision. The benefit to the individual or firm is less than the benefit to society. Thus when a positive externality exists in an unregulated market, the marginal benefit curve (the demand curve) of the individual making the decision is less than the marginal benefit curve to society.

With positive externalities, less is produced and consumed than the socially optimal level. There are many common examples of a positive externality. Immunization prevents an individual from getting a disease, but has the positive effect of the individual not being able to spread the disease to others. Keeping your yard well maintained helps your house's value and also helps the value of your neighbors' homes. Beekeepers can collect honey from their hives, but the bees will also pollinate surrounding fields and thus aid farmers. (3) To explain the benefits of Externalities more