- Positive externality
- A positive externality is a benefit that spills over from an exchange to a third party, who enjoys it without paying for it.
- Negative externality
- A negative externality is a cost that an exchange between a buyer and a seller imposes on a third party who is not part of the exchange.
Private, external and social benefit
Can you name the three kinds of benefit on an externality diagram?
On the diagram, private and social benefit are curves, and external benefit is the gap between them.
Private benefits are the part of the benefit of a good that goes to the buyer or the seller themselves.
Can you think of an example?
A flu jab protects the person vaccinated. That protection is why they pay for it, so demand, the marginal private benefit (MPB) curve, already counts it.
External benefits are the benefits of a good that go to third parties, who do not pay for them; per unit, they are the gap between MSB and MPB.
Can you think of an example?
A beekeeper's bees pollinate the apple trees in the orchard next door, so the orchard grows more fruit. The orchard owner pays the beekeeper nothing for it, so the honey price never counts it.
Social benefits are all the benefits of a good to society: the private benefits to the buyer plus the value of all its positive externalities.
Can you think of an example?
Education raises the earnings of the person educated, a private benefit. The economist Walter McMahon finds that a well-educated population also brings better health and lower crime, an external benefit. Social benefit is the two together.