EXTERNALITIES Meaning and
Definition
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Externalities are a concept in economics that refers to the unintended consequences of economic activities that affect individuals or entities not directly involved in the initial transaction. These consequences can be positive or negative and may impact various aspects of society, such as the environment, public health, or other firms in the market.
Positive externalities occur when the actions of one party generate benefits for third parties. For example, a company investing in research and development not only improves its own productivity but also enhances the knowledge and technological advancement of other firms in the industry.
On the other hand, negative externalities arise when economic activities impose costs on third parties without compensation. For instance, factories emitting pollutants into the air may negatively impact the health of nearby residents, who bear the burden of increased healthcare costs or reduced quality of life.
The existence of externalities can lead to market failures since individuals or firms do not consider the social costs or benefits of their actions when making decisions. As a result, the optimal level of production and consumption may not be achieved. Governments may intervene through regulations, taxes, or subsidies to internalize externalities and align private and social costs and benefits.
Overall, externalities reflect the external impacts of economic activities and provide a framework for understanding the broader effects of individual actions on society as a whole.
Common Misspellings for EXTERNALITIES
Etymology of EXTERNALITIES
The word "externalities" originated from the Latin term "externus", meaning "outside" or "external". The English suffix "-ity" was added, which forms nouns indicating a quality or a state. In economics, externalities refer to the side effects or unintended consequences of economic activities that affect third parties who are not directly involved in the transaction. The term was coined by British economist Alfred Marshall in the late 19th century.
Similar spelling words for EXTERNALITIES
- external orifice,
- exothermal,
- external organ,
- external gill,
- externality,
- external ear,
- externalize,
- external carotid,
- externally,
- externalisation,
- external angle,
- external storage,
- external drive,
- externalization,
- externalise.
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