Externalness

Externalness, in economics and related fields, refers to the cost or benefit of an activity or transaction that is borne or enjoyed by a third party who is not directly involved in the activity. These effects are not reflected in the market price of the good or service, leading to a divergence between private and social costs or benefits. Externalities can be positive, where the third party benefits, or negative, where the third party is harmed. Understanding and managing externalities is crucial for economic efficiency and social welfare. Governments often intervene to internalize externalities through regulations, taxes, or subsidies.

Externalness meaning with examples

• A factory polluting a river creates a negative externalness. Nearby residents suffer from health problems and decreased property values, yet the factory does not factor these costs into its production decisions, leading to overproduction and social inefficiency. This exemplifies the need for government regulations to address the environmental damage caused.
• A beekeeper's honey production provides a positive Externalness for a neighboring apple orchard. The bees pollinate the apple trees, increasing their yield. However, the beekeeper doesn't receive compensation from the orchardist for this benefit, demonstrating a market failure and potential underproduction of honey.
• A homeowner installing solar panels provides a positive Externalness for the community by reducing reliance on fossil fuels and lowering air pollution. While the homeowner bears the initial cost, society benefits from the cleaner environment and reduced greenhouse gas emissions.
• Loud music from a neighbor late at night creates a negative externalness. The noise disturbs the sleep and quiet enjoyment of nearby residents. The neighbor’s activity imposes a cost on others that isn’t accounted for in the market.
• Vaccination against a contagious disease provides a positive externalness. By getting vaccinated, an individual not only protects themselves but also reduces the risk of infection for others, contributing to herd immunity and benefiting society as a whole.