This article will help you to learn about the difference between Technological Externalities and Pecuniary Externalities.

Difference between Technological Externalities and Pecuniary Externalities

The terms themselves suggest the nature of external effects. In the former case, the produc­tion function of the producer experiencing external effects, are changed as a result of the action of the producer creating those effects.

In this case, more (or less) inputs are required to produce one unit of out­put. Suppose there are two steel industries, X and Y. Both these enterprises require a large amount of coal to melt iron ore.

Now X invents a new melting technique which helps to cut down coal consump­tion in the melting furnace. When Y also adopts this new method it also saves a lot of coal consump­tion. Such technological externalities may also be experienced in the case of consumption where util­ity functions are altered.


Pecuniary externalities, on the other hand, do not change production and consumption. These only lead to altered price-profit combinations. Sup­pose due to some exogenous factors demand for wheat increases.

The rise in demand leads to rise in output, wheat seeds, fertilizers, farm machiner­ies, etc. Obviously, a favourable wheat demand has not only increased the profitability of wheat growers, but also benefited seeds suppliers, fertilizer produc­ers and machinery manufacturers.

Secondly, externalities can also be categorized into external economies and external diseconomies. In the first case the parties receiving external effects are benefited and in the second case the concerned parties incur losses; clearly, external economies are detrimental to their interests.

While the previous example of steel industries is a case of external eco­nomies, the example of individuals A and B (noise pollution) is an illustration of external diseconomies.