Externalized benefits are positive effects of a financial transaction that benefit others or the world at large, while negative externalities harm people outside the transaction. Companies may work to create externalized benefits to be seen as socially responsible, and measuring externalities is becoming more common.
Externalized benefits are benefits that emerge from a financial transaction or business decision. These benefits, however, do not directly invent any of the parties involved in the transaction; instead, they benefit others or the world at large. A classic example of externalized benefit can be found in the beekeeping business, where a beekeeper’s bees help to pollinate plants and trees, thereby benefiting the surrounding community.
The often unintended repercussions of a financial transaction that affect people outside that transaction are known collectively as externalities. Many people divide externalities into the coarse categories of negative externalities and positive externalities. Negative externalities are things that harm people outside of the transaction, with industrial pollution being a well-known example of a negative externality. Positive externalities, also known as externalized benefits, are externalities that are seen as positive or good.
As externalized benefits have a positive effect, some companies actually work to create externalized benefits so that they are seen as more socially responsible, especially when consumers started clamoring for greener business models in the late 20th century. Generally, however, externalized benefits are simply events occurring that could not have been predicted.
Intellectual property, like inventions, often has externalized benefits as people explore the invention and remake it or come up with refinements. Sometimes entirely new applications for an invention can be discovered by people who were not involved in the original process, and many companies do invest a great deal of energy and money in trying to reap these externalized benefits.
In another form of externalized benefit known as a network externality, so many people adopt a new technology that the technology becomes widely accepted, leading to widespread benefits for users of the technology and others. For example, when the first fax machines were introduced, they were expensive and cumbersome to use, but as more and more consumers purchased them, the fax network expanded and businesses responded by developing better technology at lower cost, making the technology for everyone.
A growing interest in externalities has led to widespread attempts to track and measure positive and negative externalities when considering a company’s overall contribution to the market and the world. Firms that incur a large number of negative externalities, for example, might be seen as detrimental to society, while firms that generate externalized benefits are seen as generally positive additions to society.
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