what are externalities and why are they so important in everyday life?
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In Economics, an externality can be positive or negative.
A negative externality is a cost ascribed to a third party not included in a transaction. The common example is a chair factory selling to someone out of State. The Chair co.pany gets paid for the chair, the buyer gets a chair, but the town that lives next to the river where the chair factory dumps it’s toxic chemicals ALSO suffers the negative result of this transaction, even though they didn’t buy any chairs.
For the factory, they get to shunt the expenses of the externality to other people, so they can produce the chairs for cheaper than ordinarily possible.
In a market economy like the US, it is the governments job to force companies to internalize the costs of their business practices. They do this by illegalizing the pollution. If the government does not do this, the market system does not work efficiently and we wind up with poisoned air and water.
The reverse is true for positive externalities. The government should subsidize positive externalities, otherwise the artificially high price will reduce the amount of the product that has a positive externality.
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