ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -Term. An external benefit is a benefit not included in the market price of the goods and services being produced, i.e. a benefit not paid by those who receive it.

Detailed explanation-3: -Third party and externalities A third party could be someone affected by pollution from a factory. In this case, the third party may never have wished to be involved but is forced to encounter the externality of the production.

Detailed explanation-4: -A positive production externality (also called “external benefit” or “external economy” or “beneficial externality") is the positive effect an activity imposes on an unrelated third party. Similar to a negative externality. Going back to the example of the farmer who keeps the bees for their honey.

Detailed explanation-5: -For example, when drivers are not liable for the health damage of car exhaust, drivers will equate only marginal private cost with marginal benefit. But if drivers are forced to pay for the health damage of car exhaust, their marginal cost will go up by the amount of the external cost.