Question

Read the following text carefully: Decisions taken by factors of production in the production process often may affect the stakeholders indirectly. Such impacts at times are huge but are not accounted for, while estimating national income. Economists call them as externalities and they can be positive or negative.} {In this regard, many economists suggest carbon pricing as an important tool to ensure ecological balance. Carbon pricing tries to control greenhouse gas emissions by either placing a fee on emitting or offering subsidies on lesser emission. Through instruments like carbon tax, green cess, eco tax, etc. economists suggest moving towards greener technology eliminating such negative externalities.On the basis of the given text and common understanding, answer the following questions:
(i) Define externalities.

Hint:

Externalities are non-market impacts that may require government intervention to ensure societal welfare.

Answer 1

Externalities refer to the unintended side effects of economic activities on third parties who are not directly involved in the production or consumption of goods or services. These effects can be: 
Positive Externalities: Beneficial effects on third parties. 
Negative Externalities: Harmful effects imposed on others. 
Example: Positive: Planting trees improves air quality. 
Negative: Factory pollution harms nearby residents.