ABSTRACT

The notion of externalities has already been briefly discussed in Chapter 7. Externalities are those costs or benefits arising from production or consumption of goods and services which are not reflected in market prices. Because of this, there is little incentive for firms to curb external costs since they do not have to pay for them. Externalities can be positive or negative (good or bad). The concept of negative externalities in particular is crucial to the

understanding of environmental economics. Airlines provide a good example of environmental impacts and externalities for the leisure and tourism sector. As well as producing intended effects (satisfied consumers), air travel also produces undesirable side effects. Prominent here are noise pollution and CO2 emissions. These represent significant costs to individuals and society, but neither airlines nor their passengers pay for these costs. Environmental economics seeks to identify and quantify such costs and find ways of diminishing the undesirable side effects of economic activity on the environment. Externalities can be divided into the following categories:

●● Production on production: This is where one firm’s external costs interfere with the operation of another firm, for example, noise from discos and clubs which creates a noise nuisance to hotel residents.