What is the externality theory?

EXTERNALITY THEORY: ECONOMICS OF NEGATIVE. CONSUMPTION EXTERNALITIES. Negative consumption externality: When an individual’s consumption reduces the well-being of others who are not compensated by the individual.

What does Adam Smith have to do with externalities?

Ordinarily, as Adam Smith explained, selfishness leads markets to produce whatever people want; to get rich, you have to sell what the public is eager to buy. Externalities undermine the social benefits of individual selfishness.

What is the meaning of externality in philosophy?

(1) An externality refers to a – positive or negative – effect of an action by a person A on a third party C; (2) The effect is imposed on the third party without his/her consent; (3) The externality marks a Pareto-inefficient situation.

What is an externality example?

In economics, externalities are a cost or benefit that is imposed onto a third party that is not incorporated into the final cost. For example, a factory that pollutes the environment creates a cost to society, but those costs are not priced into the final good it produces.

Who gave the concept of externalities?

Two British economists are credited with having initiated the formal study of externalities, or “spillover effects”: Henry Sidgwick (1838–1900) is credited with first articulating, and Arthur C. Pigou (1877–1959) is credited with formalizing the concept of externalities.

Why do economists care about externalities?

Externalities pose fundamental economic policy problems when individuals, households, and firms do not internalize the indirect costs of or the benefits from their economic transactions. The resulting wedges between social and private costs or returns lead to inefficient market outcomes.

Is externality a real word?

noun, plural ex·ter·nal·i·ties. the state or quality of being external to or outside someone or something; the fact of being outer, outward, or on the surface: A child just learning to speak already has a sense of the externality of the world.

What is an externality and give an example of one?