Externalisms

Externalisms, also known as externalities, are side effects of an economic activity that affect third parties not directly involved in that activity. These effects can be either positive or negative. A positive externality occurs when an activity benefits a third party. For example, a beekeeper who keeps bees for honey unintentionally pollinates nearby crops, benefiting the farmer. This pollination is a positive externality.

Conversely, a negative externality occurs when an activity harms a third party. A classic example is pollution from a factory. The factory owner produces goods and sells them, but the pollution generated affects the health and environment of nearby residents. These residents are the third parties harmed by the factory's activity.

Externalities are a common topic in economics because they represent a market failure. In the presence of externalities, the market price of a good or service does not reflect its true social cost or benefit. This can lead to either overproduction (in the case of negative externalities) or underproduction (in the case of positive externalities) of the good or service. Economists often propose solutions such as taxes, subsidies, or regulations to internalize these externalities, meaning to make the producers or consumers of the good or service bear the cost or receive the benefit of the externality. For instance, a carbon tax is a policy designed to address the negative externality of carbon emissions.