Externality: Origins and Classifications

Externalities are ubiquitous in academic writing and, by definition, in the life of everyone. As economist Bryan Caplan explains, “positive externalities are benefits that are infeasible to charge to provide; negative externalities are costs that are infeasible to charge to not provide.” Economists and other policy advocates often urge governments to adopt policies that internalize an externality, so that costs and benefits will affect mainly parties who choose to incur them. Decisions by people and facts of nature affect us physically and mentally in positive and negative ways. People born with good looks earn a beauty premium that is largely independent of occupation. While we cannot do much about the faces we were born with, we can send signals to others by wearing stylish clothing and driving prestige cars. Such things create “positional externalities” causing resources to be frittered away on needless spending. Some argue that public policies should be considered to deal with such things.