Pecuniary Externalities Definition and Examples

Define Pecuniary Externality

A pecuniary externality is a cost or benefit associated with the production and consumption of a good. Pecuniary externalities are positive or negative effects on the utility of individuals that are not priced in the market and therefore have no financial implications.

In essence, it is a situation where an individual’s economic activities affect other people, but they do not receive compensation for these effects.

An externality is an effect on one party caused by a transaction between other parties. This can be negative or positive, and it can occur both in the private and public sectors. One of the most important examples of pecuniary externality is pollution. It’s defined as “a side effect that adversely affects others.” In general, there are two types of externalities: economic externalities and social externalities.

Pecuniary Externality Example

What are examples of Pecuniary Externality?

An example of this type of externality can be found in the case of an individual who spends large sums on car payments, maintenance, insurance, and gasoline. The person’s actions do not directly affect the market price for these types of goods; however, they have indirect effects which may potentially cause changes to it.

In other words, there are external costs that accompany this particular action.

It is a cost or benefit that affects an individual but not the person who actually creates it. Other  examples of Pecuniary Externality are:

• – Pollution from factories in China affecting people living in America.
• – The effects of global warming on sea levels and weather patterns
• A tax on pollution that would cause firms to reduce their emissions
• When a company pollutes the environment, and it costs society money to clean up the mess.
• When people who live in a high-crime area have to pay more for insurance because their risk of being victimized is higher than other people’s.
• When someone buys an expensive car but has no way of paying for gas, they often drive less often.

Non-Pecuniary Externality

A non-pecuniary externality is a term used by economists to describe an externality that has no monetary value. This means that it does not affect the price of goods or services, and therefore cannot be accounted for in terms of dollars in economic modeling.

It is a type of externality that does not involve pecuniary or financial reward but rather a non-monetary benefit.

Non-Pecuniary Externality Example

Non-pecuniary externalities are often things like the aesthetic value of a building; how attractive it makes an area look from outside compared to other buildings nearby.

Other non-pecuniary externalities could include safety factors such as how safe an area feels when you walk around at night time, even if there is little risk involved.

Negative Externality

A negative externality is an unintended consequence of a transaction that affects a third party who was not involved in the original transaction.

Negative Externality Example

An example of this would be when one company pollutes and causes the air quality to decrease for other people living nearby.

Another example will be if someone buys a product with the intention of giving it as a gift but doesn’t wrap or package it well enough so that it arrives damaged.

The externalities of a factory’s emissions on the surrounding community and the costs associated with living in an area that is prone to natural disasters are also some examples.

Positive Externality

Positive externalities are benefits that result from a transaction between two parties, and they can be either tangible or intangible.

Positive Externality Example

Examples of positive externalities: A farmer who provides free fertilizer to his neighbors, creating positive externality.

Pigouvian Tax

Pigouvian taxes are a type of tax that seeks to correct market failure. The idea is that when there is an externality, the market price does not reflect the true social costs of engaging in certain behavior. A Pigovian tax will then be collected from those who caused the negative externalities and redistributed back into society in order to repair some of these damages.

• Related: Pigouvian Tax Example

Rent-Seeking Behavior

Rent-seeking is a term in economics that states that a person or an organization seeks to increase its own wealth without offering any benefits or resources for society. Rent-seeking practices aim to obtain financial gains and benefits by exploiting the allocation of economic capital.

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