Importance of Externalities in Environmental Planning | Example & Meaning

Will you prefer to live in a house near a beautiful lake facing it and with greenery around or a canal of sewer water? This is how externalities affect any entity and hence the decisions.

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What are externalities?

Externalities are unintentional side effects of an activity affecting people other than those directly involved in the activity.

There can be two ways in which the activity or goods or services may affect positively and negatively; and hence they are called positive externalities and negative externalities.

  1. A negative externality is the one whose effect could be harmful,
  2. Positive externality on the other hand, is an unpaid benefit gained from the activity.

Externalities and Environment

In environmental terms, the externalities are mostly natural resources or those which influence public health and environmental conditions. For example, negative externality can be an industry causing pollution that reduces property value, causes health problems in surrounding area, or has an ill impact on the habitat and quality of living environment of other species and biodiversity.  A positive externality includes such actions that reduce transmission of diseases or contribute to improve the quality of environment. For example, beekeepers raise and keep bees in order to harvest money and sell it to public. In this process of creating honey, bees fly around and pollinate plants which enables them to grow. Presence of bees to pollinate plants is a positive externality that arises from the presence of honey farmers.

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Negative Externalities are the root cause of environmental problems, major cause of the same being human intervention. Small interferences from every individual collectively impose affects, potentially on each other, where overall consequence is a situation of substantial unwanted environmental changes – high ambient air pollution level, increase in average temperature, deforestation, habitat and biodiversity loss, ground water depletion and so on. Influence of third parties resist to let us achieve optimal and necessary well-being conditions.

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Role of Externalities in Environment Planning Example

Role of Externalities in Environment Planning

Protection and improvement of environment is a solution to this collective problem and is a means of achieving greater human welfare. Here the externalities play an important role in decision making and policy making in environmental planning and in the preparation of environment management plan to achieve well being goals, for humans as well as other species and environmental components to achieve sustainable development.

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Understanding Negative Externality

For an easy understanding of how these third parties play an important role in environmental planning process, decisions and policy making, let us take a common example of environment degradation – air pollution.

The alteration of air quality is measured in terms of air quality index (AQI) which gives the numeric values of chemical, biological, or physical pollutants. Undesirable presence of these impurities or abnormal rise in the proportion of the same in atmosphere cause harmful effects. Increase in any of these pollutant measure leads us to know the actual cause of this pollution. For example, increase in Particulate Matter (than the permissible value) will lead to respiratory and other chronic health diseases in humans, health problems in other species, will interfere in process of photosynthesis by blocking the sunlight, will increase visibility impairment in the atmosphere and a number of other long and short term environmental problems. All these are caused by the sources, which are nothing but externalities, like combustion engines, industries, heavy vehicles, burning of fossil fuels, burning of dried up crop waste, dust storms and many other sources.

These externalities causing lethal outcomes for environment assist the planners to work on how the conditions can be improved, with what measures can the ill effects be reduced, and in turn result in taking fruitful decisions regarding the same. Like, for increase in the amount of particulate matter, measures to reduce the combustion of fossil fuels, and opting for clean and green energy sources like renewable energy, electric motors etc. will be the first step proposals in environment planning. Increase in taxation by the industries or vehicle owners contributing to pollution is also a probable proposal in order to reduce the pollution.

Similarly, for trends with decrease in forests and urban greens, a lot of environmental problems will arise. For this externality of continuous cutting of trees and deforestation from humans, measures like forest protection acts and afforestation, increasing the urban greens in open and public areas are proposed by the planners and authority in order to control the unwanted environmental change and degradation. Planting more trees, given number for that particular area, while cutting one in place of it, comes under planning and development norms i.e. if you cut one tree, you have to compensate for it by planting given number of more tree.

Understanding Positive Externality

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One more example is use of toilets. Presence and use of toilets, is a positive externality for the environment. It helps to provide a proper disposal system of waste. Human excretion often carries harmful organisms that can contaminate water sources, soil, and increase spread of numerous diseases. Not only for humans, it is toxic for wildlife as well. Use of toilets helps reduce transmission of diseases in both humans and other animals. They also help in improving public health by controlling odours, growth of waste borne parasites, and human waste poisoning surrounding areas. Eco-toilets if being used, also help saving water used to flush, resulting in conservation of water. These toilets also help us use the waste to use in bio-gas plants or to turn the waste into manure which increase soil fertility and can be used in agriculture or for urban greens and in gardens.

As this positive externality is beneficial in terms of both environment and public health, in planning, measures to increase toilets in required and necessary areas are proposed. Construction of public toilets in villages and public areas under Swatchta Abhiyan is an initiative taken by the planners and authority.

Similarly, use of public transport is also a good example of positive externality where this activity causes reduction in the amount of fuel consumption and in turn reduces harmful vehicular emissions. Transit Oriented Development is a solution outcome given by planners which focuses increased use of public transport, bike sharing systems, as well as using active methods of transportation such as walking, cycling, skating etc. for shorter distances to be travelled. Active methods of transportation are those which use human power and these methods are proved to be good for human health too. As this system encourages the use of public transport, it also increases social interaction which is good for social environment.

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Consideration of externalities is an important part in environment planning. Their influence amends the planning process as well as decisions. Externalities causing negative effects are worked upon to be reduced or get rid of whereas positive externalities are cherished, celebrated, and are worked upon to get increased. Many times, these externalities also work as example for other similar conditions and help in easy decision taking for some other area or situation. It is also taken into account that even if the effect of any externality is not seen currently, they may lead to direct or indirect effects in future. In this way, analysing externalities, their causes, and their effects, leads planning process to workable, valuable, and useful proposals and solutions which guide to achieve well being and sustainable development goals.

Author Bio: Anusha Batra, Environment Planning and Management, School of Planning and Architecture, Vijayawada. An architect, believing in sustainable development and balancing development with environment, currently pursuing master’s in Environmental Planning and Management from School of Planning and Architecture, Vijayawada.


  1. Weighing Environmental Externalities: How to Do It Right – A. Myrick Freeman IlL Dallas Burtraw, Winston Harrington, and Alan J. Krupnick;
  2. Environmental Externalities and Transport Policy – Kenneth Button; Oxford Review of Economic Policy, Vol. 6, No. 2, Transport (Summer 1990), pp. 61-75
  3. Political internalization of Economic Externalities and Environmental Policy – Toke S. Aidt; Journal of Public Economics 69 (1998) 1–16
  4. Externalities: why environmental sociology should bring them in – Malcolm Fairbrother; Environmental Sociology, 2016 Vol. 2, No. 4, 375–384,

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