Pollution is an example of an externality which is commonly cited, but it is important to establish at this stage that there are various types of externalities and that they can be classified in different ways: they can arise from acts of consumption or production, and can thus be production, consumption or mixed externalities, and, as previously mentioned they can be experienced as external costs (negative externalities) or as external benefits (positive externalities).
Figure 1 below summarises the different possibilities and provides some examples. It can be seen from this table that there are in fact four different varieties of externality:
A) a production externality: initiated in production and received in production;
B) a mixed externality: initiated in production, but received in consumption;
C) a consumption externality: initiated in consumption and received in consumption;
D) a mixed externality: initiated in consumption, but received in production.
Each of these are sub-divided into two, according to whether they are experienced as an external cost or as an external benefit, giving a total of eight varieties.
Figure 1 The various kinds of externality
In practice, the most important externalities are those which affect the environment, and it is these which have received widespread adverse publicity in recent years, and which have prompted the rise of 'green' pressure groups and political parties. Indeed, so great has been the impact of environmental pollution, that in addition to the externalities identified in figure 1, we can also, in a global context, identify externalities which are transmitted from one country to another,and that may be mutually damaging; for example, the Chernobyl nuclear disaster in 1986 in Russia, not only contaminated the local area, but also polluted other parts of Europe; emissions of acid rain from West European nations not only harm the environment in the initiating countries, but also