Spillover Effects

Externalities occur wherever there are spillover effects, which happen when an effect of an activity spills over outside the core interactions of the activity. The effects of smoking spill over to surrounding people through secondhand smoke and, more broadly, through increased public healthcare expenditures. Sometimes spillover effects can be more subtle. When you buy a car, you add congestion to the roads you drive on, a cost borne by everyone who drives on the same roads. Or when you keep your neighbors up with loud music, you deprive them of sleep, causing them to be less productive.