An externality is a cost or a benefit that arises form production that falls on someone other than the producer; or a cost or a benefit that arises from consumption that falls on someone other than the consumer. (1)
First, the importance of studying externality comes from its universality. Externality exists so widely that everyone involved in the market cannot escape its influence. In addition, according to the notion of externality, the existence of externality means resources cannot reach the most superior disposition. Thus, externality becomes one of the most important economic problems. An externality can be a positive externality or a negative externality, so the importance of externality should include: the benefit which comes from the positive externality and the enlightenment which was given by the negative externality.
A positive externality is a production or consumption activity that creates an external benefit. (2)A positive externality exists when an individual or firm making a decision does not receive the full benefit of the decision. The benefit to the individual or firm is less than the benefit to society. Thus when a positive externality exists in an unregulated market, the marginal benefit curve (the demand curve) of the individual making the decision is less than the marginal benefit curve to society.
With positive externalities, less is produced and consumed than the socially optimal level. There are many common examples of a positive externality. Immunization prevents an individual from getting a disease, but has the positive effect of the individual not being able to spread the disease to others. Keeping your yard well maintained helps your house's value and also helps the value of your neighbors' homes. Beekeepers can collect honey from their hives, but the bees will also pollinate surrounding fields and thus aid farmers. (3)
To explain the benefits of Externalities more specific, I put planting as an example. A river bank which be well planted can avoid soil erosion bitterly. The planting can also reduced the appearing of floods, clean our air and absorb noise and dust. If some members who live near the river plant trees on the river bank, the people who live near the river and do not plant trees can also get the benefit from the trees. However, planting trees need amount of money. If trees only planted by who are willing to plant, we will not have enough trees to protect our environment, therefore governments play an important role in the solving of externality. After “National wealth Discusses" publishes for hundred years, the people believe “the market are perfect” firmly. Marshall put on the externality, but people just treated it as a sideline product and did not study the externality thoroughly. However, the externality made people think about correctness of the idea that “the market is perfect”. Especially along with the production marketability, specialized and the socialized development, the market economy and capitalist system's superiority and the malpractice are completely unmasked. The 20th century 60, the 70s, the resources problem, the environment problem, north and south problem’s sudden appearing, has caused the people to reconsider the economic growth way and the economic development, also caused some economists to explore methods to solve negative externality.(History 1) A negative externality is a production or consumption activity that creates an external cost. (4)The outside influence of the externality is not reflects through the market price mechanism. It hinders the market mechanism the useful effect, sometimes completely repels the market, or twists the market price. This kind of non-marketability supplementary influence enables the market mechanism to dispose the resources effectively. (History 2) Even if it is competing completely under the condition, namely also has not enabled the resources...