Classification of Externality

Keeping in view the nature of the problem, externality may be classified into four broad types:

1. Relevant externality- when the unconcerned parties are affected by an activity and the parties in turn demand for suitable solution to reduce its effect;
2. Pareto relevant externality - in the process of appropriate solution to the problem, affected parties are made better off without adversely affecting any one;
3. Static and dynamic externalities - in a static situation, a group overexploits the natural resource by imposing externality on others (for example, over-fishing), while in a dynamic case, the exploitation would be on such natural resource which has high future value (for example, fishing of juvenile fish species); and
4. Pecuniary externality - an activity which imposes higher price or lower cost on people or land (location of huge business, industry in a particular area).

The disposal of public bad under normal course is done in various forms through natural resources media like air, water and land by treating earth as a natural sink. In the process of disposal, if the pollution load of public bad exceeds the assimilative capacity of the natural resource, it will impose serious problem by impairing the ecological balance. Hence, the main issue is how to abate pollution to the required level in order to keep both living and non-living organisms in good health and prosperity.