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External Effect (Externality)
Negative Externality (External Diseconomy)
A negative externality, also known as an external cost or external diseconomy, is a negative consequence of an economic decision that affects third parties who are not compensated for the harm. An example is the pollution generated by a factory, which imposes costs on the surrounding community.
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Social Science
Empirical Science
Science
Economics
Economy
Introduction to Microeconomics Course
CORE Econ
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Internalizing an Externality
Marginal External Cost (MEC) (Definition)
Negative Externality Example: Robot Factory and Nurses
External Effects as a Source of Social Dilemmas
Negative Externality (External Diseconomy)
Positive Externality (External Economy)
Missing Markets as a Cause of Externalities
Inadequate Property Rights as a Cause of Externalities
Consumption Externalities
An apple orchard operates next to a beekeeper. The bees pollinate the apple blossoms, which increases the orchard's fruit yield. The apple blossoms, in turn, provide nectar for the bees, which increases the beekeeper's honey production. Neither party pays the other for these services. Which statement provides the most accurate economic analysis of this situation?
Residential Development and Air Quality
Market Outcome of Uncompensated Costs
Match each scenario to the economic description that best characterizes the primary effect described.
Policy Evaluation for a Noise Externality
A large chemical company has a manufacturing division that releases pollutants into a river. Downstream, another division of the same company operates a fish farm, which suffers reduced yields due to the pollution. This situation is an example of a negative externality.
Arrange the following events in the correct logical sequence to illustrate how a negative production externality leads to an inefficient market outcome.
When an individual chooses to get vaccinated against a contagious disease, they not only protect themselves but also reduce the likelihood of transmission to others in their community. This uncompensated benefit conferred upon the community is an example of a ________.
Evaluating the Root Cause of a Shared Resource Problem
Analyzing Production Costs and Externalities
Marginal Private Cost (MPC) (Definition)
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Environmental Damage from Production as a Negative Externality
Example of Negative Externality: Royal Dutch Shell Oil Spills in the Niger Delta
Example of Negative Externality: Bunker Hill Company Lead Poisoning in Idaho
A large-scale pig farming operation is established in a rural area. The farm is profitable, providing jobs and a steady supply of pork to the market. However, the waste from the farm runs off into a nearby river, contaminating the water source for a downstream town. The town must now invest in a costly new water filtration system, and local fishing businesses have collapsed due to the decline in fish populations. The farm does not pay for these downstream costs. In this situation, what is the specific cost that represents the negative consequence for a third party?
Analyzing an Economic Side-Effect
Analyzing an Uncompensated Cost
A chemical factory produces and sells industrial solvents. The manufacturing process releases airborne pollutants that cause health issues for people living in a nearby town. The town's residents face increased medical bills, but the factory does not cover these costs. Match each element of this scenario to its correct economic description.
Identifying Compensated Costs
A car manufacturer discovers a defect in its vehicles that increases fuel consumption for its customers. The company issues a recall and fully compensates all affected car owners for the extra fuel costs they incurred. This situation is an example of a negative externality.
Evaluating Solutions to Urban Congestion
When the production or consumption of a good imposes an uncompensated cost on a third party, such as pollution from a factory affecting nearby residents, this market failure is known as a(n) ________.
A factory that produces widgets also releases pollutants into the air as a byproduct. This pollution imposes health costs on the nearby community. Arrange the following statements to illustrate the logical sequence of events that describes this negative externality and its effect on the market.
An individual's action creates a cost for someone else. In which of the following scenarios is this cost most accurately described as a negative externality?