Final answer:
'Spill over' effects refer to the unintended consequences, or externalities, of an economic activity impacting third parties not directly involved. These can be negative, such as pollution, or positive, like unintentional free entertainment for locals due to a nearby concert. This concept is crucial in evaluating the broader social impact of economic decisions.
Step-by-step explanation:
‘Spill over’ effects describe the phenomenon where an economic activity, such as an event or a production process, has unintended consequences on third parties who are not directly involved in the activity. These effects can be either negative or positive and are known as externalities. For instance, social costs, a type of negative externality, comprise both the private costs incurred by firms and the additional costs borne by third parties, such as pollution. A positive externality could occur when an event brings additional benefits to local businesses through increased visitor spending, which is not directly reflected in the admission price of the event.
Using a real-world example, consider a concert producer planning to construct an outdoor arena. This development may lead to negative externalities, like noise pollution affecting nearby residents who were not part of the market exchange of concert tickets. However, if neighboring residents enjoy the music, they may experience a positive externality in the form of free entertainment. Thus, externalities are also known as ‘spillovers’ because their effects spill over to others not originally included in the economic transaction.