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Externalities

An externality affects someone without them agreeing to it. It can be positive or negative. Most externalities are small but can make a significant impact over time. Understanding the types of externalities and the consequences they have can help us improve our decision making.

One family member leaves their dirty dishes in the sink. They get the benefit of using the plate. Someone else bears the cost of washing it later.

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A positive externality imposes an unexpected benefit on a third party. The producer doesn't agree to this, nor do they receive a 'reward' for it.

They can occur during the production or consumption of a service or goods. Calling something a negative externality can be a way of avoiding responsibility.

We can never do one thing. We should consider what the second-order consequences will be. When we interact with a system, we need to find out what the broader repercussions of our actions will be.

They are a form of second-order effects. They arise when our decisions change the context of future perception or value.

Externalities are everywhere. It's easy to disregard the impact of our decisions - to stay late at the office or to drop litter. We run the risk of paying a price if we do not mind our actions.

  • Someone who comes up with a solution cannot expect compensation each time the solution gets used. It results in reduced incentives to invest time and effort to discover new solutions. Algorithms, patents, and copyright laws try to solve this dilemma by allowing creators to profit from...

Status symbols like diamonds, Lamborghinis, tailor-made suits lose their value if they become cheaper or if too many people own them. They derive their value only in comparison to the average of the group to whom the consumer compares. 

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