Negative Externalities
Definition
Negative externalities are unintended negative consequences that arise from economic activities and affect individuals who are not directly involved in those activities. These externalities can include pollution, noise, traffic congestion, and other harmful effects on society.
Analogy
Imagine you are at a party where someone is smoking. The negative externality is that the smoke affects everyone in the room, even those who do not smoke.
Related terms
Positive Externalities: Positive externalities occur when the production or consumption of a good or service results in benefits for third parties who are not directly involved in the transaction.
Social Costs: Social costs refer to the negative effects or consequences imposed on society as a whole due to an economic activity.
Pigouvian Tax: A Pigouvian tax is a tax levied on producers to internalize the external costs associated with their production activities.
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