Unit 5.1.4Are there any hidden costs or benefits?Positive & Negative Externalities

Key Terms Third party- a group or an individual that is

not directly involved in a decision/action.

Externalities- the effects of an economic decision on individuals and groups outside who are not directly involved in the decision.

Negative externalities- those costs arising from business activity which are paid by people or organisations outside the firm.

Negative Externalities Consumers can create externalities when they

purchase and consume goods and services.  Pollution from cars and motorbikes  Litter on streets and in public places Noise pollution from using car stereos or ghetto-

blasters Negative externalities created by smoking and alcohol

abuse Externalities created through the mis-treatment of

animals Vandalism of public property Negative externalities arising from crime

Positive Externalities A positive externality is a benefit that is

enjoyed by a third-party as a result of an economic transaction. Third-parties include any individual, organisation, property owner, or resource that is indirectly affected.

The role of government One role for government is to

implement economic policies that promote positive externalities. There are two general approaches to promoting positive externalities; to increase the supply of, and demand for, goods, services and resources that generate external benefits.

Positive Externalities There are plenty of examples of economic activities that can generate

positive externalities: Industrial training by firms: This can reduce the costs faced by other

firms and has important effects on labour productivity. A faster growth of productivity allows more output to be produced from a given amount of resources and helps improve living standards throughout the economy. See the revision notes on the production possibility frontier

Research into new technologies which can then be disseminated for use by other producers. These technology spill-over effects help to reduce the costs of other producers and cost savings might be passed onto consumers through lower prices

Education: A well educated labour force can increase efficiency and produce other important social benefits. Increasingly policy-makers are coming to realise the increased returns that might be exploited from investment in human capital at all ages. 

Health provision: Improved health provision and health care reduces absenteeism and creates a better quality of life and higher living standards. 

Employment creation by new small firms

Identify one negative externality resulting from rising car use in the UK; The development of new models by car producers Increased congestion on UK roads An increased demand for fuel A rise in the use of public transport

Identify one positive externality which will result from the opening of a new supermarket in town. The supermarket is the largest in the local area, employing over 100 staff. The supermarket has built several new roads in the are to improve access. Lower prices for local residents Access to a wider range of services Quicker journey times for drivers in the area More employment for local people

An entrepreneur intends to set up a new garage on waste land opposite a housing estate. Which one of the following is not an example of a negative externalities the business might produce? Greater congestion stemming from customers at the business Profits made by the new business Higher house prices due to the improvement of waste ground Noise made by the new business.

Mark scheme

Mark Scheme

Revision Essentials Negative Externality – A cost inflicted on

other stakeholders when an individual or business makes a choice.

Positive Externality – A benefit shared by other stakeholders when an individual or business makes a choice.