Externalities in business are “A consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative.” (Investopedia) For as much as we plan in business or life for that matter, there will always be something unexpected.
When I started my business, I planned to do social media campaigns for 10 people per month at a rate of $100 per month. I figured I could get clients easily this way and that the rate was fair. What ended up happening was clients didn’t pay and I was working round the clock not making money. This was not the experience I expected. I also happened to be starting my little adventure right when unemployment rates in the US were at an all-time low. Many small businesses were closing up or moving things like social media in house which meant what few contracts I had were precious.
“A positive externality exists when an individual or firm making a decision does not receive the full benefit of the decision. The benefit to the individual or firm is less than the benefit to society.” (Fundamental Finance) Working from home means I have no commute which means I do not need a car and do not pollute the environment with that car. I also consume less gas in my car as it is only needed a couple times a week.
Other Examples of positive externalities
- When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g you are able to educate other people and therefore they benefit as a result of your education.
- A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey.
- If you walk to work, it will reduce congestion and pollution, benefiting everyone else in the city.
“A negative externality occurs when an individual or firm making a decision does not have to pay the full cost of the decision. If a good has a negative externality, then the cost to society is greater than the cost consumer is paying for it.” (Fundamental Finance) Working from home also means that I am not out in the world consuming so I am spending less in the local economy and more online shopping. I am also using quite a bit of electricity in heating my home and using my computers and electronics to work.
Other Examples of negative externalities
- If you play loud music at night your neighbor may not be able to sleep.
- If you produce chemicals and cause pollution as a side effect, then local fishermen will not be able to catch fish. This loss of income will be the negative externality.
- If you drive a car, it creates air pollution and contributes to congestion. These are both external costs imposed on other people who live in the city.
- If you build a new road, the external cost is the loss of a beautiful landscape which people can no longer enjoy.
Every decision we make whether it be in business or in our regular lives has an effect on someone or something else. Working from home also means my puppy is with me all the time and as such she never learned to be by herself which means I have to take her with me even to business meetings. This however is a happy externality for bother her and me.
Heyne, P.T., Boetke, P., & Prychitcko, D. (2014). The Economic Way of Thinking (13th ed.). Upper Saddle River, N.J.: Prentice-Hall.