I have been rather light on blog posts over the last week as I was in Napier for the New Zealand National Premier Schoolboy Hockey Tournament. However externalities did eventuate at the end of the week with King’s College retaining its national title but also the oil spill in Napier which was right beside where we were staying.
Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.
Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.
Remember the graphs for negative externalities of production and positive externalities of consumption: