What are Externalized Benefits?

Mary McMahon

Externalized benefits are benefits which emerge from a financial transaction or business decision. These benefits, however, do not directly invent either of the parties involved in the transaction; rather, they benefit a third party, or the world at large. A classic example of an externalized benefit can be found in the business of beekeeping, where a beekeeper's bees help to pollinate plants and trees, thereby benefiting the surrounding community.

A beekeeper's bees provide externalized benefits to communities.
A beekeeper's bees provide externalized benefits to communities.

The often unintended repercussions of a financial transaction which have an impact on people outside of that transaction are collectively known as externalities. Many people break externalities into the rough categories of negative externalities and positive externalities. Negative externalities are things which harm people outside of the transaction, with industrial pollution being a well-known example of a negative externality. Positive externalities, also known as externalized benefits, are externalities which are viewed as positive or good.

Because externalized benefits have a positive effect, some companies actually work to create externalized benefits so that they will be seen as more socially responsible, especially when consumers began clamoring for more environmentally friendly business models in the late 20th century. Commonly, however, externalized benefits are simply happenstance events which could not have been predicted.

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Intellectual property such as inventions often comes with externalized benefits, as people explore the invention and retool it or come up with refinements. Sometimes, entirely new applications for an invention may be discovered by people who were not involved in the original process, and many companies actually invest a great deal of energy and money in an attempt to reap such externalized benefits.

In another form of externalized benefit known as a network externality, so many people adopt a new technology that the technology becomes widely accepted, leading to widespread benefits for users of the technology as well as others. For example, when early facsimile machines were introduced, they were expensive and cumbersome to use, but as more and more consumers bought them, the fax network expanded, and companies responded by developing better technology at lower cost, making the technology available to all.

A growing interest in externalities has lead to widespread attempts to track and measure positive and negative externalities when considering a company's overall contribution to the marketplace and the world. Companies which incur a large number of negative externalities, for example, may be viewed as detrimental to society, while companies which generate externalized benefits are viewed as generally positive additions to society.

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Discussion Comments


@pleonasm - That seems to be a very common tactic now. Companies will claim a positive externality or spillover benefit occurs when they carry out the work they would do anyway and ignore any of the negative effects.

Like the forestry industry at the moment. They are always saying that they are providing more carbon capture and oxygen and so forth, ignoring the fact that they often cut down virgin forests and replace them with what amounts to dead forests of pine and other commercial woods.

I like the example of the beekeepers better. But, you know, they are benefiting from the bees pollinating as well. They eat that food as much as anyone else.

I really think that they need to reevaluate the way companies work and take into account the fact that externalized benefits or negative outcomes affect everyone including whoever is running the company. They talk about it as though they aren't human and part of the community as well, but they are, and they'll suffer or benefit as much as anyone else.


@bythewell - I'm not sure if that is clearly an externalized benefit or not. It's difficult to say with some things.

Clearly third parties are benefiting from the technology that was developed by the console companies, but in developing their programs they are creating additional reasons for people to buy the consoles. That means that indirectly the development companies are going to benefit from their work.

So, does that count as an externalized benefit? The same could be argued for anything though, since you can always use advertising to promote the externalized benefits of your work.

So the third parties are getting a solid benefit out of the companies, but the companies are also getting good press and therefore being seen in a more positive way and might get benefits from that.


I suppose you could argue that at the moment the new technology being developed by video game console companies have external benefits.

I've heard of all kinds of different hacks people have done with them, particularly the ones where you can move and a camera will pick up your movements and translate them to the screen.

Of course, this is just supposed to apply to the video games that you purchase from the company, but people have started making their own programs to exploit the technology.

One thing I've seen is a virtual dressing room, where you can "wear" clothes on the screen and turn around to see yourself from all sides.

Of course, if the company is smart, they will buy up all the good programs that are being developed and sell them but I'm sure a lot of them will be given away for free as well.

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