Positive externalities occur when a transaction benefits parties not directly involved. Examples include property improvements and pollution reduction. Such events can have far-reaching effects, benefiting future generations.
A positive externality is a type of benefit that generates some kind of additional benefit for the parties that weren’t directly involved in the original transaction. With this type of event, the buyer and seller directly involved receive benefits from the business, but the nature of the transaction itself has a positive impact on others who have some type of connection to the buyer or seller. This phenomenon can occur in a wide range of scenarios, with both commercial and personal events triggering some type of positive externality.
A common example of a positive externality in a personal setting would involve a homeowner choosing to make improvements to their property. By improving the amenities associated with the property’s buildings, such as making landscaping improvements that help make the area more attractive and inviting, the benefits occur on multiple levels. The owner has the advantage of a more attractive property which is likely to be seen as more valuable on the real estate market. At the same time, the landscaper benefits from being paid to do the work. Above and beyond these two parts, the surrounding property owners benefit, as the landscape improvements also have a positive effect on the value of their properties, even if they have contributed nothing to the task.
Within a business context, a positive externality can occur when a business chooses to make improvements to a plant operation that help limit the amount of waste and pollution generated as part of business operations. For example, if smoke filtration systems are installed in the chimneys of a paper mill, the owner of the business is likely to benefit from being able to receive government tax breaks for the business. The company that manufactured the filtration systems also benefits from the sale to the paper mill. In addition to these direct benefits, people living in the vicinity of the paper mill also benefit, as the fumes and gases emitted by the plant are significantly reduced, allowing them to enjoy cleaner air and fewer health risks, even if they are not they did nothing to assist in the purchase and installation of filters.
Sometimes, the positive externality that is generated by some type of transaction has far-reaching effects, providing benefits to both future generations and those living today. As with the filtration systems, the cleaner environment created by the installation means that people living in the area in subsequent decades will still enjoy the benefits of the transaction, even if they weren’t in the area at the time the systems were installed. , or perhaps we notice that they are still born. In this sense, the reality of positive externality can be seen as one way in which legacies for subsequent generations are created and sustained from one era to the next.
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