Externalities
Externalities are the costs or benefits of an activity that fall on people who are not part of it, like pollution from a factory.
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Externalities are the costs or benefits of an activity that fall on people who are not part of it, like pollution from a factory.
- Negative externalities harm others
- Positive externalities help others
- Taxes can make polluters pay
🧠 Quick quiz
Three questions. Score 2 or more to complete the topic.
What is Externalities?
Within Economics & Civics, which covers money, markets, business, government, law and citizenship: how societies are organised and run, this topic explains Externalities. Economics and civics topics explain how money, markets, laws and government affect people, so each topic here pairs a clear definition with a model.
Check that you can explain Externalities in your own words and give one example from everyday life. If you can do that, you have understood the core idea.
Understanding Externalities helps you read the news critically and weigh up policies, choices and arguments about society.
Externalities in detail
An externality is a cost or benefit that affects a third party who is not part of a transaction. Negative externalities impose costs on others, such as pollution from a factory, noise or the health effects of passive smoking. Positive externalities give benefits to others, such as vaccination, education and a neighbour's well-kept garden.
Markets tend to produce too much of goods with negative externalities and too little of those with positive ones, because private costs and benefits differ from social ones. Governments respond with taxes (the polluter pays), regulations, subsidies and education. Climate change is often called the biggest market failure caused by externalities.
How the interactive helps you understand Externalities
Watch the cycle in the interactive. Use any sliders or buttons it offers to change the values and see how the cycle responds.
Before you change anything, predict the result. Then change one value at a time and check whether your prediction was right. This is a quick way to build a correct mental model of Externalities.
Real-life uses and examples
- Use Externalities to weigh up the pros and costs of a policy or decision.
- Explain Externalities to a classmate using a choice you make yourself, such as spending pocket money.
- Give a balanced answer about Externalities by considering more than one point of view.
Common mistakes to avoid
- Confusing a short-term effect with a long-term one.
- Giving an opinion without evidence or a clear economic or civic reason.
- Learning the definition without testing it. Use the quiz and the interactive to check that you can apply the idea.
Frequently asked questions about Externalities
What is Externalities?
Externalities are the costs or benefits of an activity that fall on people who are not part of it, like pollution from a factory.
What are the most important points about Externalities?
The main points are: Negative externalities harm others; Positive externalities help others; Taxes can make polluters pay.
Why is Externalities useful?
Understanding Externalities helps you read the news critically and weigh up policies, choices and arguments about society.
How can I practise Externalities?
Open the interactive at the top of this page and change the controls one at a time. Predict the result before each change, then take the three-question quiz. A score of two or more marks the topic as complete on this device.
Which topics are related to Externalities?
Related topics in Economics & Civics include Understanding Statistics in Society, Citizenship Projects, Opportunity Cost.