- EXTERNALITIES -
(Investopedia)
(Naked Economics)
POSITIVE and NEGATIVE EXTERNALITIES
"A positive externality is a positive effect or benefit realized by a third party resulting from a transaction in which they had no direct involvement."
A farmaceutical company finds the cure for cancer, therefore BENEFITS all cancer patients. The company ALSO BENEFITS from this in an economical aspect. We can see that the company will make a lot of money because the demand will automatically increase. Subsidies also play an important role in this. How? The government will be able to subsidize this product because of its importance. It lowers the firm's cost of production and therefore, make it profitable for them.
It is a "spillover" benefit. In other words, EVERYBODY WINS.
"A negative externality occurs when a product or decision costs the society more than its private cost."
Someone who smokes is eventually affecting the people around him/her by the smoke.
This is also an interesting example of both positive and negative externalities. A person who smokes benefits from the action itself but at the same time, it is affecting others. People around a smoker are known as passive smokers, who at the end of the day are more affected by it than the smoker itself. This is a negative externality. However, these people will most likely have a lower life span, which means that they will die younger and benefit others through Social Security.
At the beginning I asked if we are paying for the consequences of the products or services that we consume... I feel like in many ways we are affecting others either negatively or postively in any way, shape or form. However, we don't always realize it. But, do you think we should be paying for these consequences? Maybe not necessarily with money but we should be taking responsibility for those actions, especially if it affects others negatively.