Somtochukwu

Externalities is a type of market failure. It can be positive or negative. Externalities leads to inefficiency in distribution.

Externalities can be defined in the following ways;

It is any cost or benefit generated by one agent in its production or consumption activities but affecting another agent in the economy.

Externalities are also described as cost or benefit of a transaction that are incurred or received by other members of the society but not taken into count by the parties of the transaction.

Externalities are also called ‘Third Party Effect’ or ‘Spill Overs’ and sometimes called ‘Neigbourhood Effect’ because partied other than the primary participants in the transactions (consumers and producers are affected).

Externalities may be harmful or beneficial. If the effect or impact on the third party is adverse, it is called Negative Externalitiy. If it is positive, it is called ‘Positive Externalities’.

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