positive externalities

sustainability of a project

The positive externalities they refer to the various beneficial effects not related to the costs of production or consumption activities in society. The reality is that all our actions in the society in which we live, no matter how small or simple they may be in our opinion, have repercussions on the others that comprise it. In other words, this type of externality occurs when the actions we take as a company, as an individual, or as a family have a pleasant and useful side effect on everything else.

In this article we are going to focus on explaining what positive externalities consist of, their characteristics and usefulness.

What are they

positive externalities

positive externalities are all the positive effects of the activities of members of society, not implicit in the costs or benefits of those activities. The definition of positive externality is not limited to any particular field or science, it includes all those positive effects, large and small, that the actions of any individual or company can have on our society.

positive externalities

We are talking about positive externalities that are not included in production costs or purchase prices, but that can have very beneficial results for society as a whole. The investment of hospitals and laboratories to find cures for certain diseases is an example of this. At first, you might think that this commitment to R&D could cost a lot if researchers can't find a cure quickly.

Reality tells us quite the opposite, that this type of activity is very necessary for the well-being and health of people, since sooner or later a drug will be found that lessens the effects of the associated disease. This medicine, which takes a while to obtain, combined with a significant financial investment, will have a very positive externality for society by saving thousands of lives, but this is not reflected in the cost of conducting such a long and superior investigation.

Likewise, there are many more activities that can generate positive externalities for society, which in turn are essential for its proper functioning:

  • Invest in the maintenance of public goods (roads, buildings, parks, stadiums, hospitals).
  • Education (maintenance of schools, qualified teachers, adequate curriculum).
  • Medical Investigation (vaccines, drugs, innovative treatments).

negative externalities

Unlike a positive externality, a negative externality is a consequence of undertaking any activity that causes harm to society, not implied in its cost. Although we are dealing with concepts from the economic field, these concepts can be extrapolated to any field of daily life.

A good example of a negative externality is the pollution of the environment, especially industry, by large corporations. Imagine the case of a large mining company specializing in the extraction and processing of coal. When measuring the cost of carrying out an activity, they do not take into account the high level of pollution that it will cause to the environment. This is considered a negative externality and is the result of the production process of the company and is not reflected in the sales price or the cost of producing the coal.

If we stop and think, almost all actions have negative externalities for society. For example, tobacco use has harmful side effects for the user's health, but creates negative externalities such as depreciation of infrastructure (if a person smokes in a room, the walls can be discolored and damaged by smoke), and can even have a negative impact on someone's health (asthmatic patients who inhale cigarette smoke).

How to control negative externalities and enhance positive ones?


The government has measures to control and reduce the generation of negative externalities, such as:

  • Taxes on the most polluting companies to promote the use of renewable energy and sustainable production processes.
  • Regulate certain activities (for example, smoking, traffic in big cities).
  • Educational programs and social awareness.

On the other hand, there are also mechanisms that enhance and increase the positive externalities generated by companies and people:

  • Grants to educational centers (nurseries, schools, etc.).
  • Provide funding for research and development, especially in the scientific and medical fields.

Externalities, whether positive or negative, they exist not only in the economic sphere of society. Any type of behavior, such as smoking or throwing plastic on the sidewalk, can have a short/long-term impact on society, which can be negative or positive, depending on the behavior.

Consumption externalities

negative externalities

Certain consumer behaviors may have external influences or secondary effects that are not considered in the transaction price. Consumption externalities can be positive or negative. The costs or benefits of production, use or recycling must be taken into account when formulating green economy policies.

Externalities arise when property rights and the use of natural resources provide only private benefits without taking into account negative or positive impacts.

In summary, you yourself can be influenced for better or worse without being involved in buying or selling the product. In any case, intervention in this economic activity is necessary to improve the well-being of those affected.

To be efficient, market prices must correspond to their costs or benefits. When a new product has fewer negative externalities and/or more positive externalities than traditional products, but is more expensive to produce, it should be proportionally taxed. The fiscal expenses of the community will be compensated by reducing public expenses for correct the externalities that have not occurred. The products will then be competitively priced without losing profit and consumers will be encouraged to buy. Producers win, consumers win, and the environment wins.

For this reason, we must consider environmental externalities and assess the direct and indirect impacts of production on the environment. This value must be taken into account when comparing products, especially if the purchase is for the public sector. The cheapest product is not always the cheapest.

For example, countries that emit more carbon dioxide must pay more taxes. That is why the government should punish companies that pollute. Again, these companies will pass these costs on to the selling price. Thanks to this, green companies gain competitiveness. These incentive policies are designed to reduce negative externalities.

I hope that with this information you can learn more about positive externalities and their characteristics.

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