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Positive and Negative Externalities

The Government monitors and regulates businesses in both the public and private sectors, to ensure they are complying with Federal, State and local rules and regulations.  The result of these regulations can be referred to as positive or negative externalities.  

Provide an example of positive and negative externalities in the police (public) sector. What kind of impact can these externalities have on a budget and the people responsible for creating the budget?

An externality is referred to as a benefit or a cost that emerges from an activity and it has an effect on a third party who did not choose to incur the cost or benefit for example the society. In general terms they are the costs and benefits that are linked with the production or consumption of a good or service. Externalities can either be positive or negative based on the nature of the effect on the third party. Externalities that are negative cause too much of a product to be produced while positive externalities too little products to be produced.

Public goods are those that are hard to prevent people from benefiting from such as clean water, national defense, clean air, law enforcement and many others. These are examples of positive externalities. In many circumstances negative externalities occur (Lavenex & Uçarer, 2003).

Examples of Externalities are as follows
Positive externality

The fear of crime is always there. But, a community’s degree of involvement with law enforcement activities can make all the difference. The role of  citizens is essential  in preventing crime and is “important since they may alert authorities, provide evidence, and denounce offenders” (Ferrer, 2008, p.2).

Negative externality:

Negative externality occurs when the rate of community involvement is lower than the crime rate. If the rate of crime decreases because of community involvement then this would reduce the marginal productivity of expenditures on law enforcement (Ferrer, 2008,  p.8). However, if the rate of crime increases because the community does not want to be involved then the marginal productivity of expenditures will increase.

A governing body of a nation  can prevent negative externalities by taxing goods and services that produce spillover costs, and a governing body of a nation can encourage positive externalities by subsidizing goods and services that generate spillover benefits.

These externalities have an impact on the budget as well as the people creating the budget since the costs and have to be internalized. The market has to spend additional funds in order to compensate for damages that will be incurred hence there will be an impact on the budget (Papandreou, 1998).


Lavenex, S., & Uçarer, E. M. (2003). Migration and the externalities of European integration. Lanham, Md. [u.a.: Lexington Books.

Ferrer, R. (2008, October). [PDF] Breaking the law when others do: A model of law ... Retrieved from www.econ.upf.edu/.../Rosa%20Ferrer%20BTLWOD%20Revised%20version. pdf - Similar

Papandreou, A. A. (1998). Externality and institutions. Oxford: Clarendon Press.

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