Externalities in Business Essay Example
Definition of externalities:
Externalities recently became an important and a popular term in the business world, especially with the risen of debates and arguments about the externalities’ costs and benefits, and the ethical issues related to it. Almost everybody deals with an externality everyday but without being aware of it (kaydee, 2008).
The simple definition of says that Externality is the effect of an economic transaction which impacts somebody who was not involved in that transaction. The more complicated definition sates that Externalities can be defined as the different types of effects which impact some parties (individual or entities) as a consequence of other parties’ activities. These effects occur without any choice of the affected party and without taking their interest into account by the affecting party (kaydee, 2008).
When any economic trade occurs between two parties, they both benefit from the trade. Sometimes, a third party is being affected as well by this trade, the effect can be a negative effect or a positive one; and these effects are what we call externalities (Anon., nd).
For example, if we take any business organization as one party and the customer is the other party, they both have the trade of the organization sells or provide goods or services, and the customer pays to obtain this good or service. However, the society as a whole could be considered as a third party, any external costs the society pays or any external benefits it gains from this trade (costs and benefits not included in the market price of the goods or services) are then considered to be an externality. By breaking down this example, the business organization or the customer can be considered to be the affecting party, the society, the third party, is thus will be the affected party, the external costs and benefits are the externalities (Anon., nd).
Types of externalities:
There are two types of externalities, the positive type and negative type.
Externalities recently became an important and a popular term in the business world, especially with the risen of debates and arguments about the externalities’ costs and benefits, and the ethical issues related to it. Almost everybody deals with an externality everyday but without being aware of it (kaydee, 2008).
The simple definition of says that Externality is the effect of an economic transaction which impacts somebody who was not involved in that transaction. The more complicated definition sates that Externalities can be defined as the different types of effects which impact some parties (individual or entities) as a consequence of other parties’ activities. These effects occur without any choice of the affected party and without taking their interest into account by the affecting party (kaydee, 2008).
When any economic trade occurs between two parties, they both benefit from the trade. Sometimes, a third party is being affected as well by this trade, the effect can be a negative effect or a positive one; and these effects are what we call externalities (Anon., nd).
For example, if we take any business organization as one party and the customer is the other party, they both have the trade of the organization sells or provide goods or services, and the customer pays to obtain this good or service. However, the society as a whole could be considered as a third party, any external costs the society pays or any external benefits it gains from this trade (costs and benefits not included in the market price of the goods or services) are then considered to be an externality. By breaking down this example, the business organization or the customer can be considered to be the affecting party, the society, the third party, is thus will be the affected party, the external costs and benefits are the externalities (Anon., nd).
Types of externalities:
There are two types of externalities, the positive type and negative type.