Externalities

Externalities and International Trade Economy

In relation to international trade economy, Christopher Mark (1993) provided the following definition of Externalities: Spillover benefits or costs arising from an economic activity that are not taken into account by producers, resulting in levels of production that are inappropriate from the standpoint of the economy as a whole. The presence of “positive externalities” or external benefits means that insufficient resources will be devoted to producing the product in question unless incentives (e.g., subsidies) are given to producers. For example, one of the imponant positive externalities affecting trade in high-technology products involves private research and development (R&D) activities, since firms may be unable to completely appropriate for themselves the payoffs from their R&D investments. In contrast, negative externalities (sometimes called “diseconomies”) imply overproduction unless the activity is appropriately taxed or otherwise constrained by governmental authorities. Unchecked pollution by manufacturers is a commonly cited example of negative externalities.