“Externalities” is the term economists use to describe hidden costs associated with a given product. For example: Let’s say there’s a factory in Canada that produces something that a lot of people use. Users agree: it’s a great product. But making and using it creates costs that affect everyone —not just those who use the product. Say that manufacturing and using a product creates air pollution. The impact of that pollution doesn’t just affect the product’s users. It becomes a cost to everyone. This snow tire company is a case in point. Although the company may not realize it, it’s affecting the environment when it makes tires. The company has an impact on a resource — in this case, clean air — that it doesn’t pay for. And neither do the people who use those tires. Polluted air presents a health risk – and a cost – to anyone who breathes it in. In this example, that’s our externality, and it’s a negative one. Pollution is an additional cost that comes with producing the product, but which is not reflected in the price paid by the buyer. From an economic perspective, that means that some of the costs of the production and use of snow tires have been shifted from the company and consumers to society as a whole. If the snow tire company’s production and disposal of tires are releasing pollutants into the air, and society has an interest in correcting that, there are a number of policy options that could help. Government can play a role in helping address the negative spillover costs that can come with externalities. As we all know, reducing pollution is not free. The prices of goods that pollute would go up, but the costs to society would fall. By using the tools at their disposal, governments can help ensure that the price reflects the actual cost of production – and that means it includes the cost of the negative externality. This balances supply and demand and shifts behaviour towards actions that pollute less, like recycling or making cleaner products. This ensures that the amount of a good or service that is produced is optimal, or fair, for society as a whole.