Definition
External economies, also known as positive externalities, are the benefits that occur to others outside of an economic transaction. These benefits are provided by an entity but enjoyed by individuals or groups who do not pay for them. As a result, the entity producing these benefits has no economic incentive to continue doing so unless other compensatory mechanisms are in place.
Examples
Public Parks and Recreation Areas: Public parks provide recreational space not only for those who actively use them but also for nearby property owners who benefit from increased property values and an aesthetically pleasing environment.
Education: A well-educated population benefits society at large through greater innovation, higher productivity, and reduced crime rates, even though the costs are borne by the students and/or the state.
Healthcare Vaccinations: Immunizations reduce disease spread, thereby protecting individuals who did not receive the vaccination.
Street Lighting: Adequate street lighting contributes to public safety and security, benefiting the community beyond those directly maintaining the lights.
Frequently Asked Questions (FAQ)
1. What are external economies?
External economies occur when an entity’s actions produce benefits for others without being compensated.
2. How are they different from internal economies?
Internal economies benefit the entity conducting the activities, while external economies benefit third parties.
3. Why do producers have no incentive to create external economies?
Since the producers are not compensated for these external benefits, they do not have a direct financial incentive to continue producing them unless other mechanisms (like government subsidies) are established.
4. Can external economies lead to market failures?
Yes, because the market may under-produce beneficial goods and services that create external economies, necessitating government or community intervention.
5. How can society encourage the production of external economies?
Society can encourage them through subsidies, tax incentives, regulations, or public funding of beneficial activities.
Related Terms
- Negative Externalities: Costs imposed on third parties, such as pollution from a factory affecting nearby residents.
- Public Goods: Non-excludable and non-rivalrous goods that benefit all, like national defense.
- Market Failure: Situations where free markets fail to allocate resources efficiently, often due to externalities.
- Subsidies: Financial support given by the government to encourage activities seen as beneficial to society.
- Social Cost: The total cost to society, including both private and external costs.
Online Resources
Suggested Books for Further Studies
- “Economics of the Public Sector” by Joseph E. Stiglitz - A comprehensive guide on public sector economics, including externalities.
- “Microeconomics” by Robert Pindyck and Daniel Rubinfeld - Offers insights into microeconomic principles, including externalities.
- “Public Finance and Public Policy” by Jonathan Gruber - Covers various aspects of public economics, including the impact of externalities.
- “The Economics of Welfare” by A. C. Pigou - A foundational text on welfare economics and externalities.
Fundamentals of External Economies: Economics Basics Quiz
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