In the consumer-producer relationship, any type of interaction between them can affect one or both parties. When an interaction impacts people or businesses that aren’t part of that relationship, it’s called a negative externality. The two types of negative externalities are production and consumption externalities, and learning about them can help you identify them in your professional life.
In this article, we define negative externalities, explain the two types, share methods for overcoming them and offer some negative externality examples.
What is a negative externality?
A negative externality is something that impacts a person or people who are uninvolved in a situation. For example, if you’re playing loud music while driving through your neighborhood late at night, you may wake up your neighbors. This can cause them to lose sleep, which might lead to negative health effects.
In many cases, if a business’s goods or services have negative externalities, the market could be at risk of failing. Organizations and individuals identify negative externalities to ensure they can reduce their harm, or take steps to ensure a positive outcome.
Types of negative externality
The two primary types of negative externalities are production and consumption, meaning that companies overproduce goods or that consumers over-consume goods. Review these types of negative externalities and how they work:
Negative externalities of production
Negative externalities of production come as a product of a production process that causes harmful effects. For example, manufacturing factories may produce loud noises when they create products, which can affect people who live or work near these factories. In this situation, other people aren’t actively participating in the production process, but it’s still impacting them.
Some business practices and regulations reduce the effects of the production process, such as labor laws that keep employees safe.
Negative externalities of consumption
Negative externalities of consumption come as a product of social costs, or the cost of an affected community, being more expensive than private costs. When someone consumes something that leads to a negative effect on someone else, a negative consumption externality exists.
Other people don’t participate in consumption, but these activities affect them nonetheless. For example, if a server who doesn’t smoke works in an establishment that allows smoking and develops a health condition related to smoking, they’re experiencing the effects of a negative externality.
8 negative externality examples
It’s helpful to view examples of negative externalities so you can gain a better understanding of what they look like and how they may impact the community, environment and economy around you. You can review these examples of negative externalities:
1. Air pollution production
This externality affects the air of anyone within a certain amount of distance from a factory or manufacturer that produces air pollution. Factories may produce harmful gases, such as carbon monoxide, that they release into the atmosphere. As a result, those in the surrounding environment may breathe these gases in, which can lead to health issues.
2. Water pollution production
This externality may have negative impacts on those using water located around a factory or manufacturer. For instance, if a factory that produces laundry detergent dumps toxic industrial waste into a nearby lake, the lake becomes full of pollution. Those who rely on this lake for water use are at risk of being exposed to polluted water, which may lead to negative health conditions.
3. Farm production
This externality usually impacts anyone living near a farm or ranch. For example, any antibiotics given to farm animals to quicken growth or any bacteria these animals have may spread to water.
This water can drain away from the farm and into nearby lakes or others’ yards, which can contaminate these bodies of water and people’s properties. Lesser externalities of farm production may include the noise of farm equipment or the smell of the animals.
4. Garden production
This externality can impact anyone living near a garden where people use pesticides or fertilizers that contain harmful chemicals. These chemicals can enter the atmosphere for people to breathe in, or people may directly consume these chemicals once someone harvests the garden for consumption. In extreme situations, this can produce harmful health effects for people breathing in the chemicals.
5. Traffic congestion consumption
This externality typically impacts any motorist on a road or street. For instance, when many motorists are on the road, traffic delays may begin. This traffic congestion may increase commuting times, fuel waste, smog in the atmosphere and the possibility of traffic crashes. Traffic congestion is a regular externality for which many travelers plan, lessening its effects.
6. Noise consumption
This common externality occurs when someone uses or consumes something that makes a lot of noise and affects others. For example, if a person who lives near a business plays music loudly from their car in their driveway, a negative externality exists. This disruptive music may cause nearby restaurants to lose patrons and surrounding businesses to lose their customers, or just cause general annoyance.
7. Secondhand smoke consumption
This externality can impact anyone around a person who’s smoking a cigarette. Secondhand smoke, otherwise known as passive smoke, exists any time someone who’s smoking exhales into the atmosphere and adds smoke into an environment where other people may be. Passive smoke in the air can cause health issues.
8. Strobe light consumption
The purchase and display of strobe lights and other related flashing decorations can have a few negative externalities for others. For example, some individuals have medical conditions that prohibit them from viewing flashing lights and make them photosensitive. Displaying these decorations may also cast additional light on the neighborhood, which some may find bothersome.
Methods for overcoming negative externalities
There are several methods people and the government may employ to help overcome negative externalities that may harmfully affect populations. These methods usually include the following:
Local or state governments may impose taxes on negative externalities that affect residents in their areas. For instance, a state government may impose a tax on factories or manufacturers to encourage them to use less harmful materials to create their products. An effective imposed tax ideally equals the cost of the negative externality.
Implementing rules and regulations
Regulations, such as no-smoking rules, may exist at places of businesses, public parks and government organizations. Implementing these regulations can encourage people to participate in safe, healthy and positive activities. An effective regulation system can impose fines on those who refuse to follow these rules.
Giving charitable donations
Often, there are charities located in places that actively work toward reducing or eliminating negative externalities. For example, many organizations help prevent and eliminate water pollution and smoking. Citizens might consider donating to these types of charities and organizations to help overcome negative externalities in their area.
Local or state governments can also overcome negative externalities by requiring places like factories, bars, farms and nurseries to obtain certain permits to operate. They can price these permits to encourage these places to operate more safely for the environment and others. Requiring these permits may help reduce the number of negative externalities that affect certain areas.
I hope you fin this article helpful.