On the modern research agenda externalities occupy a rather prominent position. The increasing complexity of modern technology and society seems to create yet additional unwanted side effects that require classification on a lengthening list of extern...
On the modern research agenda externalities occupy a rather prominent position. The increasing complexity of modern technology and society seems to create yet additional unwanted side effects that require classification on a lengthening list of externalities. However, externalities are of interest not only as current policy issues but also from a more theoretical point of view.
An externality is said to exist if an activity of one party(household or firm) affects the utility or production possibilities of another party without being priced. Therefore using Pigou's terminology, we say that when an externality is present there are divergences between private and social cost.
The purpose of this paper is to clarify the cause of externality by defining it precisely. And in order to understand the essential characteristics of externalities, we shall be dealing with the various types of externality.