Externalities are consequences imposed on outside parties during production or consumption. There are two types of externalities: positive and negative. Positive externalities occur when a person or group of people benefit from the production or consumption of a good without being directly involved in the production or consumption of that good.
For example restaurants in Orlando receiving extra customers as a result of the attraction of Disney World would be a positive externality. The restaurant owners did not pay to build the amusement park, but they get extra business as a result of the park.
Negative externalities occur when a third party is not directly involved in the production or consumption of the good creating the externality suffers negative results. An example of a negative externality would be increased cancer rates in people living downstream of a polluting computer factory. The people who got cancer as a result of living downstream of the factory may not work at that factory, and may have never bought a computer produced at the factory, but they still suffer a cost from the production of the computers. An example of a negative externality is smoking. Even people who don't smoke have to suffer a negative externality of second hand smoke from the people smoking near them. Other negative externalities include pollution, land and water degradation, and over-use of resources.
Positive and negative externalities are further categorized into production and consumption. A positive consumption externality occurs when someone benefits as a result of someone else consuming. A negative consumption externality occurs when someone suffers as a result of other people consuming. A positive production externality occurs when someone benefits from a positive externaility as a result of someone else producing goods (ex. when a donut shop makes donuts, passerbys benefit from the delicious odors of donuts being made, regardless of whether or not anyone buys them). A negative production externality occurs when someone suffers a negative externaility as a resuly of someone else producing goods (ex. when someone living next to a factory deals with the hazards associated with pollution from the production of goods created by the factory).
Another important issue with positive and negative externalities is the pollution that occurs as a result of the production of goods. Such pollution can affect large numbers of people and animals and can have long term health and environmental consequences.
When a country grows, the population on average becomes wealthier relative to its recent history. This is because a country that acquires or improves their standing as a more developed country is automatically "better off," regardless of how small or large the improvement actually is. However, there is no set relationship between a country's wealth, and the overall distribution of income. The overall GDP of a country could increase, yet the wealthiest man could own 99% of the money and therefore the increase may not be beneficial to the nation as a whole. Therefore income inequality in the United States is huge.
Income distrbution differs across households and individuals because of differences in jobs and economic history. The distribution of income can be represented by the Lorenz curve. The Lorenz curve shows the proportion of wealth that familes have from the poorest to the richest. Thus, a perfectly linear curve shows perfect equality, and a backwards L shaped curve represents a situation where only one person has all the wealth. The Lorenze curve also shows the relationship between the cumulative population and the cumulitive wealth as an example was given previously.
Sustainability is defined as the ability of a country to stay in a consistently developing or more developed state by meeting the needs of the present without compromising the ability of future generations to continue development. Sustainable growth entails output increses which do not limit future output potential by running down available resources. Sustainability can be achieved through:
*The production of secondary goods (manufacturing)
- The production of tertiary goods (services)
These two actions are the only way that a country will succeed with long-term growth, as an economic system which does not utilize resources at or below the rate of at which these resources regenerate will ultimately collapse. Examples of economic practices that promote sustainability would be the use of renewable energy sources, anti-deforestation laws, etc.
Dependence on primary goods will not increase sustainability in the long term. Instead, it can only help in the short run, as there are finite amounts of natural resources. A primary good is more likely to fail and an overall dependence of a nation on such goods is risky. As technology increases the efficiency of retrieving natural resources, the selling price of natural resources greatly decreases with even a marginal increase in retrieval efficiency. Thus, primary goods are largely undependable as a sustainable good; they are too erratic to be sustainable. Due to their inelasticity, they can cause unpredictable price changes. This is not stable because producers cannot predict enough to invest properly. Secondary goods and tertiary goods are sustainable or at least more sustainable because they are more based on the mind rather than the body. Secondary goods are between tertiary goods and primary goods. Secondary goods are made by using raw materials efficiently to make a manfactured good. There is still the limit of finite resources but there is the infinite resource of ideas to make the product more and more efficient as time progresses.
Accounting for externalities can be another important part of sustainable growth.
The challenge for sustainability is to curb and manage Western consumption while raising the standard of living of the developing world without increasing its resource use and environmental impact. This must be done by using strategies and technology that break the link between, on the one hand, economic growth and on the other environmental damage and resource depletion.