Explain the meaning of the term ‘externality’ and give an example of one that is negative.

In Economics, externalities occur when producing or consuming a good/service causes an impact on third parties not directly related to the transaction. These impacts can be both positive or negative. Graphically, the social cost and private cost of production/consumption are no longer equal causing a deadweight welfare loss.
An example of a negative externality would be making furniture by cutting down rainforests in the Amazon. Firstly, it harms the indigenous people of the Amazon rainforest. It also leads to higher global warming as there are fewer trees to absorb carbon dioxide.
The social cost of making furniture is greater than the private cost to a firm.

Answered by Tutor199527 D. Economics tutor

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