Unit 5.1.4
Are 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.
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Pollution from cars and motorbikes
Litter on streets and in public places
Noise pollution from using car stereos or ghettoblasters
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
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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;
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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.
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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
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?
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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.