Classification of External Costs

A company invests in a solar power plant. The electricity produced is used by the company, but the reduction in greenhouse gas emissions benefits everyone.

• External Benefits of Consumption
• External Benefits of Production

An individual gets vaccinated against a contagious disease. This not only protects the individual, but also others in the community by reducing the spread of the disease.

• External Benefits of Production
• External Benefits of Consumption

A farmer plants trees along the edge of his fields. The trees provide shade and habitat for wildlife, but also help prevent soil erosion, benefiting other farmers downstream.

• External Benefits of Consumption
• External Benefits of Production

A person buys an electric car. This reduces their own carbon footprint, but also contributes to cleaner air for everyone in their city.

• External Benefits of Production
• External Benefits of Consumption

A factory disposes of its waste into a nearby river. This allows the factory to avoid waste disposal costs, but harms local wildlife and potentially contaminates drinking water sources.

• External Costs of Consumption
• External Costs of Production

A person smokes in public places. This provides pleasure to the smoker, but exposes others to second-hand smoke, potentially harming their health.

• External Costs of Production
• External Costs of Consumption

An oil company drills for oil in a wildlife reserve. The company profits from the oil, but the drilling process disrupts local ecosystems and can lead to oil spills.

• External Costs of Consumption
• External Costs of Production

These scenarios illustrate how our actions can have impacts beyond our immediate sphere, affecting others in ways we might not initially consider.

• External Costs of Production
• External Costs of Consumption