Difference between Positive and Negative Externalities

An externality takes place only when a third party incurs a cost or benefit. This third party is, however, not involved in any transaction such as a buyer or a seller of any sort.

Externalities have an impact on the third party who is by no means involved in any way in the production and consumption of products or services. The main difference between a positive externality and negative externality is the fact that the third parties enjoy the benefits of a transaction or consumption between the selling and buying parties.

On the other hand, in a negative externality, the third party has to bear the cost of a transaction between the producers and the consumers. The third party is not involved in the transaction but nonetheless it has to bear the cost. The negative and positive externalities exist due to economic activities where the purpose is to reduce the negative externalities by applying penalties in order to increase the positive externalities.

Instructions

  • 1

    Positive Externalities

    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 Externalities

    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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