Negative Externality
Negative externality is an economic term used to describe a situation in which a third party is affected by the actions of two other parties. It occurs when the production or consumption of a good or service has a negative effect on a third party, such as a decrease in property values or an increase in pollution. Negative externalities can be caused by a variety of activities, including manufacturing, transportation, and energy production.
History of Negative Externality
The concept of negative externality was first introduced by British economist Arthur Pigou in 1920. Pigou argued that when a good or service is produced or consumed, the costs of production or consumption are not always fully borne by the producer or consumer. Instead, some of the costs are passed on to third parties, such as the environment or the public. This is known as an externality. Pigou argued that these externalities should be taken into account when making economic decisions.
Since then, the concept of negative externality has been widely accepted and used in economic theory. It has been used to explain a variety of economic phenomena, such as the tragedy of the commons, the free-rider problem, and the environmental costs of production. It has also been used to explain why certain goods and services are under-produced or over-consumed.
Comparison Table
| Type of Externality | Effect on Third Party |
|---|---|
| Positive Externality | Benefit |
| Negative Externality | Cost |
Summary
Negative externality is an economic term used to describe a situation in which a third party is affected by the actions of two other parties. It occurs when the production or consumption of a good or service has a negative effect on a third party, such as a decrease in property values or an increase in pollution. Negative externalities can be caused by a variety of activities, including manufacturing, transportation, and energy production. For more information on negative externalities, visit websites such as Investopedia, The Balance, and the World Bank.
See Also
- Positive Externality
- Tragedy of the Commons
- Free-Rider Problem
- External Cost
- External Benefit
- Marginal Cost
- Marginal Benefit
- Social Cost
- Social Benefit
- Opportunity Cost
