Theory of External Benefits
- Externalities are where the consumption or production of a good impacts on people other than the producers or consumers that are participating in the market for that good.
- They are the side effects borne by third parties.
- In each case the firms or the individuals will bear some form of cost known as the external cost. There are a number of types of externality.
- Private firms generally ignore the damaging effects their production can have as long as they make a profit.
- However, as well as producing external costs, some firms cause external benefits.
- External benefits are free and no payments need to be made by the people receiving it.
- External benefits must also be taken in account when deciding whether or not a particular use for the resources of land, labour and capital is worthwhile from society’s point of view.
Sources:
- http://www.bized.co.uk/virtual/dc/copper/theory/th19.htm
- Economics Oxford Book