Externality:

The hidden cost in economics

The economic effect of ecology disturbing new commodity is termed as externalities of production and consumption.

Any situation in which utility of one individual is influenced by an activity under the control of the other.

The difference between the social cost and private cost is external cost.

•Externalities are inescapable attributes for nearly all economic processes

•Externalities are market imperfections where the market offers no price for service or disservice

•These externalities lead to market failure

•Externalities can be:

Ø Positive externality or

ØNegative externality

•The negative externality (adverse effect) seems to draw most attention

Types of Externality:

1.Technical externality (true externality):

ØTechnical externality are the true externality that affects the actual production and consumption of other producers or consumers.

ØIt can be positive or negative

ØNegative technical externality: E.g. : Discharge of waste by factories in river kills the fishes and make it impossible for fisherman to harvest fishes from river.

ØPositive technical externality: E.g.: Beekeeping helps to pollinate the orchard thereby increasing fruit production. Similarly, bees collect nectar from fruit trees and increase honey production.

Pecuniary Externality:

•It is not a true externality

•It does not affect the actual consumption or production possibilities of other producers or consumers but only affect their cost of production or consumption. A negative externality may occur as a result of the project pushing up the price of specialized input.

•This externality will force others to pay more for it as a result of the project’s increased demand

•Pecuniary externalities do not change production and consumption. These only lead to altered price-profit combinations. Sup­pose due to some exogenous factors demand for wheat increases.

•The rise in demand leads to rise in output, wheat seeds, fertilizers, farm machiner­ies, etc. Obviously, a favorable wheat demand has not only increased the profitability of wheat growers, but also benefited seeds suppliers, fertilizer produc­ers and machinery manufacturers.

3. Externalities created during production process:

•The externalities may occur in any stage of project’s life,

•Several externalities may be created during production process

•The water and air pollution caused by the industrial projects are the example of negative externality created in production process

•However the pollination caused by the bee during production process is the example of positive externality to the fruit grower

4. Externalities created in distribution of project outputs:

•There are several externalities created during the distribution process of projects outputs

•For e.g. trucks carrying sand and gravels to construction site for construction process may damage the roads, cause noise pollution, air pollution and can cause a number of accidents this is an example of negative externality created during distribution process

•The street entertainers on the other hand while distributing their services, entertains the passing people on road who may or may not reward the entertainers. But acquire the message they want to deliver through the song, drama etc. that creates the positive externality during distribution process.

5. Externalities created in the consumption of project output

•The externality created during consumption process may be positive or negative.

•For e.g. the consumption of soap and cleaning detergent by one person may produce positive externality for others, including a more pleasant, odorless environment and reduced the risk of disease. Or the availability of public education will create externality for the whole community by improving the range of services and goods available.

•Respiratory diseases caused by passive smoking  is the example of negative externality produced during the consumption of the product