What are externalities in economics Class 12

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In this lecture, we are going to discuss about externalities. Externalities topic is concerned with GDP and Welfare topic of national income accounting chapter of macroeconomics class 12 CBSE Board.

externalities is an important topic of macroeconomics. A 1 mark or 3 mark questions can be formed out of it.

What are externalities in macroeconomics class 12?

In general, externalities are the harm and benefits resulted to one from the activities of the other for which other neither paid for benefits nor penalized for harm.

Examples of Externalities:-

Environmental pollution caused by industrial plants, construction of flyover that reduces the time and cost of journey, Use of Public parks by those who does not pay taxes. etc.

Definition of Externalities class 12

I am giving definition of externalities as mentioned in different books of economics of class 12 CBSE Board.

“When the activities of one result or harms to other with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.”

S.K Aggarwal

“Externalities refer to benefits or harms of an activity caused by a firm or an individual, for which they are not paid or penalized.”

Sandeep Garg

“Externalities refer to good and bad impact of an economic activity without paying the price of penalty for that”

T.R Jain

“Externalities refer to the benefits or harms a firm or individual causes to another for which they are not paid or penalized.”


Types of Externalities

Externalities can be catagerised into two.

Positive externalities:-

When activities of one result in benefits of the other without receiving and payment. Such benefits are called positive externalities.

Example of positive Externalities:-

  1. construction of a flyover or a highway reduces transport costs and journey time of its users who have not contributed anything towards its cost.
  2. Mr. X maintains a beautiful garden and Mr. Y enjoys it. It adds to the welfare of Y but he does not pay for it to Mr. X.
  3. Use of Public Parks by the people for pleasure for which no payments are made by the public. It increases welfare through positive effect on health.

Negative Externalities:-

When activities of one result in harm of the other without penalizing. Such harm are called positive externalities.

Examples of Negative Externalities.

  1. Smoke emitted by factories causing air pollution. It results in health hazards thus reduces economic welfare. But factories does not pay to the public for risking their health
  2. Industrial waste is driven into rivers, causing water pollution. it causes health problems. But Industries does not pay or penalized for it.

Difference between Positive and negative externalities

Positive ExternalitiesNegative Externalities
It is the benefits results from the activities of one to other with no payment received in returnIt is the harm results from the activities of one to other with no punishment in return.

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Anurag Pathak
Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.
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