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--DEFINITION--
--DEFINITION--
EXTERNALITIES occur when the actions of consumers and producers give rise to SIDE-EFFECTS that impact THIRD PARTIES who are not part of these activities.
--POSITIVE--
--POSITIVE--
…if the impact on third parties involves BENEFITS, then it is referred to as a POSITIVE EXTERNALITY, also known as an EXTERNAL BENEFIT.
--NEGATIVE--
--NEGATIVE--
…if the impact on third parties involves COSTS, then it is referred to as a NEGATIVE EXTERNALITY, also known as an EXTERNAL COST.
-PRODUCTION-
-PRODUCTION-
…if the benefit arises from PRODUCTION activities it is referred to as a ‘POSITIVE EXTERNALITY OF PRODUCTION’
-PRODUCTION-
-PRODUCTION-
…if this cost arises from PRODUCTION activities it is referred to as a ‘NEGATIVE EXTERNALITY OF PRODUCTION’
-CONSUMPTION-
-CONSUMPTION-
…if the benefit arises from CONSUMPTION activities it is referred to as a ‘POSITIVE EXTERNALITY OF CONSUMPTION’
-CONSUMPTION-
-CONSUMPTION-
…if this cost arises from CONSUMPTION activities it is referred to as a ‘NEGATIVE EXTERNALITY OF CONSUMPTION’
-MERIT GOODS-
-MERIT GOODS-
GOODS/SERVICES that create EXTERNAL BENEFITS are called MERIT GOODS.
-DEMERIT GOODS-
-DEMERIT GOODS-
GOODS/SERVICES that create EXTERNAL COSTS are called DEMERIT GOODS.
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