Externalities are hidden costs that are not accounted for in the production of a good or service. Explore this concept with our video and discussion guide.
Discussion guide
After you’ve watched this video with your students, use this guide to explore key concepts, check for comprehension and lead a discussion.
Key concepts
- Externalities are hidden costs that are not accounted for in the production of a good or service.
- Externalities often affect society as a whole and not just the consumers of a good or service. They can be positive or negative.
- Negative externalities such as pollution can be addressed through government intervention, such as policies, taxes and innovation grants.
- Consumer behaviour may shift when externalities are factored into the price of a good or service.
Comprehension check
Ask the following questions.
What is an externality?
An externality is a hidden cost associated with a given product that is not accounted for during production. An externality often affects society as a whole and not only the consumer of the good or service.
What common externality is a result of industry?
Pollution is a common negative externality that results from industry production.
How can governments help address the effects of an externality?
Governments can address the effects of negative externalities such as pollution through taxation, strong environmental policies, grants for innovation, or eco-fees for safe disposal and recycling. All of these measures would help reduce pollution by providing the incentive for cleaner industries and discouraging environmental damage.
How does accounting for externalities—reporting the true cost of a product—affect supply and demand?
When the costs of externalities are included, the price of a good or service may rise, but the cost to society falls. Accounting for the externality helps to balance supply and demand and shifts consumer behaviour toward recycling or choosing cleaner products.
Group discussion
Ask the following questions.
- What are some other negative externalities? If negative externalities have a detrimental impact, what are some positive externalities that benefit society or the environment? Brainstorm a list of both.
- What are some production examples in Canada that you think have externalities?
- What are some examples of everyday goods or services around you that may already have an added cost to address externalities, such as an eco-fee or carbon tax?
- What might be some challenges in pricing externalities in one particular country, region or type of industry, but not in another? How effective do you think the different government interventions might be?
To learn even more, see The Economy, Plain and Simple on the Bank of Canada website: Climate change is a big issue for central banks
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