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3.3  Externalities

The analysis should cover whether externalities, positive or negative are generated by the supply of the good or service, and identify any risk exacerbators (that is, those whose actions create negative externalities, or who put a positive externality at risk).

Risk exacerbators act in ways that might make it necessary for government to become involved, depending on the nature of the risk. Most of the examples outlined in this guidance demonstrate positive externalities; that is, where the supply generates benefits that extend beyond the parties to the arrangement.

However, negative externalities occur when harmful effects are generated. In this way, government may have a role to play in designing goods or services (and the associated charges) in a way that encourage actions with positive externalities and discourage actions with negative ones.

Example: Externalities

In the previous example, vaccinations are shown to generate positive externalities by helping to build herd immunity. In this way, the public at large benefits from the actions of a smaller group of people directly engaged with vaccinating.

A common example of a negative externality is pollution arising from risk exacerbators who engage in wasteful or carbon intensive activity. There is a range of ways in which government might respond to this behaviour. Responses relevant to this guidance include things like selling permits to pollute.

Similarly, cost recovery in the management of fisheries includes the principle that the 'cost of conservation services or fisheries services provided to avoid, remedy, or mitigate a risk to, or an adverse effect on, the aquatic environment or the biological diversity of the aquatic environment must, so far as practicable, be attributed to the persons who caused the risk or adverse effect' (section 262 of the Fisheries Act 1996).

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