Economics: What are Externalities?

Externalities arise when economic decision-making generates costs or benefits to parties other than decision-makers (Visser, 2014). There are externalities of minus and plus. When an action of a party leads to the interests of other parties, social benefits outweigh the private interests because there is positive externalities. Negative externalities arise if the actions of one party have a detrimental effect on the other party. In terms of negative externalities, social costs are higher than personal costs. If personal costs are not equal to social costs, market failure will occur.

Negative externalities (also called "external costs" or "external noneconomics") are economic activities that adversely affect irrelevant third parties. It may occur during production or consumption of goods and services. Contamination is called externality because it is costly for producers of contaminated products and "outside" people by consumers. Barry Commoner commented on the cost of external factors: Anthropogenic climate change is the result of greenhouse gas emissions from fossil fuel combustion and livestock breeding. "A tough review on economics of climate change".

The economic case of limit and transaction (or carbon tax) is obvious. The negative impact of climate change and its associated emissions is called the negative impact of externalities in economics. Many theoretical and empirical studies support environmental regulations that impose pollution activity (or they restrict pollution with permission and allow polluters to exchange their licenses). The additional production cost of taxes or permits leads to a decline in profits in polluted industries, a reduction in the supply of polluting products, and an increase in the price of contaminated goods. As the price of contaminated goods rises, consumers use less contaminated goods. As the price of non-renewable energy rises and the price of renewable energy goes down (technology advancement), we have reached Hotlin's "turning point" and the demand for renewable energy is also rising. The price of non-renewable energy is more or less restricted by alternative prices of renewable energy, and the world is a more environmentally friendly place. "