Externality

(redirected from Negative externalities)
Also found in: Dictionary, Thesaurus.
Related to Negative externalities: Positive externalities

Externality

The cost or benefits of a transaction to parties who do not directly participate in it. Externality can be either positive or negative. For example, a merger can lead to higher share prices and bonuses for employees, benefiting shareholders and employees at the two companies merging, This can create wealth and positively impact a community. On the other hand, the merger can drive a competitor out of business, which results in layoffs and reduced wealth, which can hurt a community. Externality is also called spillover or the neighborhood effect. See also: External benefit, External cost.
References in periodicals archive ?
20254 (2014) (observing that retail stores' bankruptcies produce negative externalities for other businesses).
Furthermore, the kinds of justice questions that arise in relation to negative externalities of national policies are clearly issues upon which reasonable disagreement often exists.
Existing law and policy literature in support of taxing traditional energy or subsidizing renewable energy has relied on the existence of these negative externalities as sufficient justification for policy intervention.
According to most economists, the optimal form of regulation of firms that produce negative externalities is a tax known as a Pigouvian tax, named after the English economist, Arthur Pigou.
Their work on human perception suggests that due to loss aversion, the availability heuristic, and our bimodal response to catastrophic risk, we will give much greater weight and attention to negative externalities and consistently undervalue positive externalities.
Our analysis shows that bankrupt firms impose negative externalities on non-bankrupt neighboring firms through the weakening of retail agglomeration economies," the authors conclude.
2014] And while economy fulfills its main function which is to meet needs of human, it creates positive and negative externalities.
Issues relating to negative externalities is another reason for regulating financial markets which is justifiable for financial firms with government-insured deposits; insurance firms that provide government-mandated non-contracting third party insurance and organizations which underwrite long-term life insurance and annuities.
At first glance, the Pigouvian formulation might appear to be an acceptable strategy for dealing with the consumption of a good that generates negative externalities (tobacco) or with the production of one that is consumed collectively (highways), but this line of reasoning assumes that the revenue raised by selective excise taxes is spent in the ways intended--that is, for treating smoking-related disease or for maintaining the interstate highway system.
The limitations of the Coasian solution for large-scale negative externalities thus provide justification for public intervention.
But the main weakness on the side of its supporters has been the scarcity of real-life scenarios of large number negative externalities where private Coasean bargaining resulted in externality mitigation.
In particular, Smith (1998) and Walker and Jackson (2008) have suggested that the reason for the observed tax levels is that gambling taxes have been set in order to capture economic rents, rather than to internalize negative externalities or to maximize economic welfare.