External benefit – definition
An external benefit is the benefit gained by an individual or firm as a result of an economic transaction but where they are not directly involved in the transaction. External beneficiaries are collectively called ‘third parties’. External benefits can arise from both production and consumption.
Many, if not most transactions create external benefits – examples include:
- Taking a bus reduces congestion on a road, enabling other road users to travel more quickly.
- Buying a burglar alarm may deter possible burglars from a street or an area, which provides a benefit to other home owners.
- Making any purchase that results in paying indirect tax may provide benefits as a result of the increased public spending that may arise. The same purchases generate income to firms (which is a private benefit) but those firms may spend some of their income on staff training -the benefits of this training may be transferred to other firms if the employee leaves and moves to a new firm.
- The building of a new block of apartments may require the developer to build access roads to the new block. These roads can be used by residents of other buildings.
External beneficiaries can be seen as ‘free-riders’ given that they derive a benefit but do not pay for the benefit they derive. Where the goods are ‘merit goods’, such as education, governments may provide subsidies to encourage consumption so that the benefits may be widely gained by more than just those can afford to pay.
Diagram to show an external benefit from consumption:
Stagflation is a combination of high inflation, high unemployment, and stagnant economic growth. Because inflation isn't supposed to occur in a weak economy, stagflation is an unnatural situation. Slow growth prevents inflation in a normal ...
The laissez-faire economic theory centers on the restriction of government intervention in the economy. According to laissez-faire economics, the economy is at its strongest when the government protects individuals' rights but otherwise doesn't intervene. The ...
What Is Adverse Selection? Adverse selection is a term that describes the presence of unequal information between buyers and sellers, distorting the market and creating conditions that can lead to an economic collapse. It develops ...
Explaining The K-Shaped Economic Recovery from Covid-19 A K-shaped recovery exists post-recession where various segments of the economy recover at their own rates or levels, as opposed to a uniform recovery where each industry takes the same ...
Does Public Choice Theory Affect Economic Output? Both on paper and in real life, there is a solid relationship between economics, public choice, and politics. The economy is one of the major political arenas after all. ...
Largest Retail Bankruptcies Caused By 2020 Pandemic As we know at this point, the COVID-19 pandemic has thrown major companies in the US and the world over into complete havoc. Many have filed for bankruptcy, with an ...