A phenomenon known as an environmental externality occurs when an economic undertaking produces positive or negative effects on an external party (environment and society) not directly connected to the said activity. This external party is not directly engaged in economic activity, and the repercussions can be either beneficial or adverse. Let’s explain this with an example of Environmental Externality.

To illustrate, the negative externality of erosion and chemical runoff resulting from road construction leads to water pollution downstream, which contrasts with the positive externality arising from the establishment of a university in a low-income region with limited access to higher education, contributing to an increase in high-earning taxpayers.

What is Positive Environmental Externality?

Termed as a 2beneficial externality or surplus externality, a positive externality occurs when an individual or company produces a good service or product that brings positive outcomes for others.

For instance, in production, a company engaging in research and developing new technology is a positive externality, as the entire society benefits from the resulting invention. Similarly, in consumption, opting for a bicycle or walking to work instead of using a vehicle is another example of a positive externality. This choice benefits not only the individual but also contributes to pollution reduction, which is advantageous for the broader community.

Also Read: What is Life Cycle Assessment (LCA)?

What is Negative Environmental Externality?

A negative externality emerges when an individual or company produces a good service or product that has detrimental effects on others. These repercussions, though damaging, are not factored into market prices as they exist outside the market framework.

For instance, in production air pollution caused by factories is a negative externality. Factory owners, focused on their well-being, may overlook the impact on bystanders’ air quality. Consumers, in turn, aren’t charged for the health risks associated with pollution when purchasing a good, resulting in a negative externality. In consumption, consider passive smoking as another example.

How to Deal with Environmental Externalities?

Addressing externalities involves implementing or reinforcing the regulation of activities with adverse external effects. Instances of such regulations include environmental regulations, prohibitions on littering, and laws governing the use of endangered species. This approach is applied when dealing with negative externalities, as it eliminates the positive incentive to produce a good or engage in a service associated with harmful external effects.

Recommended: What is a Geologic Sequestration?

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Elliot is a passionate environmentalist and blogger who has dedicated his life to spreading awareness about conservation, green energy, and renewable energy. With a background in environmental science, he has a deep understanding of the issues facing our planet and is committed to educating others on how they can make a difference.

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