In Economics Externalities Are Costs

In Economics Externalities Are Costs


Introduction. 1

Three Externalities. 1

Situations these three externalities exist. 2

Solutions to these externalities. 2

Stakeholders involved in externalities. 3

Roles of stakeholders in regard to externalities. 3

Conclusion. 4



In economics, externalities are costs or benefits that result from transactions or activities and affect an uninvolved party whose choice was not to incur the particular cost or benefit. These externalities can either be positive or negative. Negative externalities are actions of products on consumers which have a negative implication on the third party. Positive externalities are actions on product which are beneficial to the third party (Tulkens, & Chander, 2006). The paper will identify and discuss three externalities that exits in particular situation. It will also highlight solutions to mitigate these externalities. It will finally analyze the different stakeholders involved in the externalities and their role regarding the externality

Three Externalities

There are negative externalities related to environmental consequences. An example of a negative externality with environmental consequences is pollution. There are different forms of pollution; air, water and noise. Air pollution has public health implications, and causes damage to buildings and crops. Water pollution has the potential of causing harm to humans, plants and animals. Noise pollution on the other hand might cause disruptions both mentally and psychologically to people and animals.

Public goods are an example of a positive externality. These are goods which people can not be excluded from enjoying their benefits. Public goods include clean water, public defense, law enforcement, social amenities and so on. These goods are accessible for most people in society (Tulkens, & Chander, 2006).

If businesses start accepting payments online for the services and goods they offer, these actions can lead to a negative externality. This means that clients no longer need to buy paper cheques in order to pay which means that cheque printing firms will loose revenues. It can also lead to unemployment in banks for employees who were in charge of processing cheques

Situations these three externalities exist

In the course of the operation of a company there are byproducts created .These by products makes their way into their environment and cause pollution. Air pollution results from the burning of fossil fuels in industries. Water pollution occurs when industrial wastes are deposited into water sources. Noise pollution occurs in situation where the production process leads to destructive sounds that get into the atmosphere .Public goods exist for the satisfaction of the needs of the entire society. These goods exist so that everyone in the society can benefit from them. If such goods did not exist then people in the society would suffer since they can not afford some of these goods (Tulkens, & Chander, 2006).  For instance a person can not have the finances to build their own roads to use. A common trend in business today is selling products online. Many companies are slowly embracing e-commerce which is why it has become a common form of conducting business

Solutions to these externalities

            Pollution can be addressed through making proper arrangements when it comes to disposing byproducts from manufacturing processes. These disposal methods can include dumping them in landfills instead of dumping them without taking any caution. It also involves flushing waste into oceans instead of allowing them run into rivers. There can also be adopting sound mitigation mechanisms so that excess noise from the factory does not reach the public. If organizations become keen on using new technologies that reduce emissions then the problem of pollution will be solved. Ensuring that the public goods are available for the entire society is a way of reducing the chances of people lacking important amenities (Tulkens, & Chander, 2006).   For instance government and non governmental organizations can come up with programs for immunizations like flue shots which will help prevent the spread of flu in society. Discouraging businesses from going into e-commerce can lead to people making purchases through cheques. Therefore, organizations manufacturing these cheques will still be in business.

Stakeholders involved in externalities

There are different stakeholders who are involved in these externalities. These stakeholders are involved at different levels of occurrence of the externalities. The stakeholders include the government, the community, suppliers and employees.

Roles of stakeholders in regard to externalities

The government has a role to play when it comes to some of these externalities. The government has a mandate to enact laws against pollution. Companies should ensure that they follow these laws to the latter failure of which they can face prosecution from the government. The government is also in charge of providing public goods. It should ensure that they provide these goods to the society and always maintain them.

Suppliers of cheques and employees in banks are the ones who suffer in cases where businesses adopt e-commerce business strategies. This is because their work is providing the cheques for suppliers and clearing cheques for employees in banks. Incase a business carries its transaction online then they will have nothing to do as their involvement with the business will have been cut short (Tulkens, & Chander, 2006).


There are many externalities which exist. The effects of negative externalities can be mitigated and at the same time the benefits of positive externalities can also be enhanced. Therefore, companies should strive for the creation of positive externalities’ and reduce negative externalities.



Tulkens, H., & Chander, P.  (2006). Public goods, environmental externalities and fiscal competition selected papers on competition, efficiency and cooperation in public economics. New York: Springer.





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