Negative Externality
Definition
A negative externality is an external cost imposed on third parties due to the production or consumption of a good or service.
Analogy
Imagine you're having a picnic with friends and someone nearby starts smoking cigarettes. The secondhand smoke becomes a negative externality for you and your friends since it harms your health without your consent.
Related terms
External Cost: An external cost refers to the costs incurred by third parties due to economic activities such as pollution or noise.
Marginal Social Cost (MSC): MSC represents both private costs and external costs associated with producing one additional unit of output. It includes all costs borne by society.
Pigouvian Tax/Subsidy: A Pigouvian tax is levied on producers who generate negative externalities while a Pigouvian subsidy is provided for activities that create positive externalities. These measures aim to internalize the external costs or benefits.
"Negative Externality" appears in:
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Practice Questions (5)
In a market with a negative externality, which of the following is true?
Which of the following is an example of a negative externality?
In a negative externality, the socially optimal quantity occurs when?
What happens to the deadweight loss when a per-unit tax is imposed on a monopoly with a negative externality?
Which of the following situations best describes a negative externality?
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