Productivity and Externalities

The meaning of productivity

Productivity is a measure of the efficiency of production — the amount of output produced for each unit of input used. The more output obtained from the same input, the higher the productivity.

Ways to raise productivity

• Training and education of workers so that they are more skilled and efficient.
• Use of modern technology and machines to speed up production.
• Specialisation and division of labour so that each worker becomes expert at a task.
• Incentives and motivation, such as bonuses, that encourage workers to work harder.

Externalities

An externality is a side effect of a production or consumption activity on a third party who is not directly involved, without any payment or compensation. There are two types.

• Positive externalities benefit others, for example education that produces a more skilled society, or tree planting that cleans the air.
• Negative externalities harm others, for example air and water pollution from a factory that damages the health of nearby residents.

Private cost and social cost

Private cost is the cost borne by the producer itself, such as the cost of raw materials and wages. Social cost is the private cost plus the cost of negative externalities borne by society. When a negative externality exists, the social cost is greater than the private cost.

The importance of productivity

High productivity brings many benefits. For a firm it lowers the cost per unit of output and raises profit and competitiveness. For workers, higher productivity often leads to better wages. For the nation, rising productivity produces more goods and services from the same resources, which contributes to economic growth and a higher standard of living. This is why governments and employers constantly encourage efforts to raise productivity.