Question

how pollution fits as a externality?

Answer 1

An externaltiy can be defined as the actions of others which affects our consumption or productiion bundles.

Pollution is generally regarded as a negative externaltiy. Take a famous example of a factory and a fisherman

A factory is situated upstreams of a river and it dumps its waste into the river. On the other hand, fisheman catches the fish from the river in the downstream side of the river. Since, the waste product dumped by the firm is polluting the river, it will decrease the quantity (because some fish will die because of water pollution) and quality (not healthy fishes wil be there) of fishes in the river. As result, the actions of a firm are negatively affecting the fisherman. Hence, pollution is considered as a negative externality.

Take another example, two persons are sitting in room. Person A and person B. Person A likes smoking while person B is a patient of Asthama and does not smoke. So, when person A smokes, it pollutes the air and creates problem for person B who likes pure fresh air to breath.