When the benefits are exceeded as a whole then a positive externality, which is sometimes also known as external benefit occurs. Here the benefits from production and consumption are enjoyed by society. In this scenario, a third party other than the buyer and seller will receive benefits as a result of the transaction. The training and the relevant education provided to the employee is an added advantage and promotes positive externalities as with the help of trained employees the productivity of an organisation is increased. This consequently reduces the cost of training new employee by that firm. With the increase in productivity of an organisation, the overall standard of living also improves within that society, creating harmony and tranquillity.
The research into innovative technologies is another perfect example of positive externality. The proper investment and use of new technology can have tremendous effects on the entire industry, reducing production costs, while improving the safety standards overall. These subsequently have a positive impact on producers and consumers.
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Negative externality which is also called external cost, occurs when the third party suffers some loss due to a transaction between the producer and consumer. That ironic part is that the third party literally has no part in this transaction but nonetheless it has to bear the cost of the transaction. Pollution is one of the main external cost as an organisation burns toxic material, these harm the overall condition of the environment and damage the health of the people living in society.
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