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There are a number of kinds of economic activities that lead to positive externalities, which are external benefits. These actions help the society as a whole and have benefits that are not captured by the people who engage in the activities. Therefore, the benefits are external. Let us look at a few examples.
If a business designs a new manufacturing process that uses less energy, there will be external benefits. The price of electricity could conceivably go down if the process is widespread enough. The amount of pollution would be decreased. These are things that would help all people, not just the firm that invents the process.
Education is another thing that has external benefits. If a person goes to college, they are helping people other than themselves. For example, as college graduates, they will be statistically less likely to commit crimes or to need government assistance. This reduces the costs they impose on society. They are also increasing their human capital, which will help the economy as a whole thrive. They will not capture all of the benefits of these things. Some of the benefits that come from their actions will spill over and help other people in society.
External benefits are a form of positive unintended consequences. One of the areas in which this is most often discussed is energy efficiency. The less energy it takes to make a product, the lower your costs. There are two major externalities resulting from this that can be a major benefit to your business. The first is that it has a net positive effect in ameliorating climate change and reducing pollution, something that benefits all of your stakeholders. Next, because many people invest and consume ethically, deliberately choosing to buy products from companies with green credentials, this can also serve to attract customers.
Similarly, programs that reduce waste and recycle have the immediate effect of cost savings but also have many of the same external benefits as energy efficiency, namely improving the quality of life on our planet and creating good will.
This also works in the opposite direction; initiatives begun as forms of Corporate Social Responsibility can have a positive impact on profitability.
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