




































Economy 
ISSN : 2313-8181 
Vol. 2, No. 3, 58-63, 2015 
www.asianonlinejournals.com/index.php/Economy 

 

 

* Corresponding Author 

 

 

58 

 

Construction Externalities: A Theoretical Insight and the 

Nigerian Scenario  

 

Ugochukwu Stanley Chukwudi
1*

 --- Mbakwe Chinwendu Christopher
2
 --- Ajator Uche

3 

 
1,2,3 

Department of Quantity Surveying, Nnamdi Azikiwe University, Awka, Anambra State, Nigeria. 

 

Abstract 
 

 

 

 

 

 

 

 

 

 

 

 
 

 

 
This work is licensed under a Creative Commons Attribution 3.0 License 

Asian Online Journal Publishing Group 

 

Contents 
1. Introduction ............................................................................................................................................................................... 59 

2. Problems of Construction Externalities in Nigeria ................................................................................................................ 60 

3. Purpose of the Study ................................................................................................................................................................. 60 

4. An Overview of the Construction Industry ............................................................................................................................. 60 

5. The Nigerian Construction Industry ....................................................................................................................................... 61 

6. Construction Externalities ........................................................................................................................................................ 61 

7. Conclusion and Recommendations .......................................................................................................................................... 62 

References ...................................................................................................................................................................................... 62 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Very little is known about the subject of construction externalities, especially amongst stakeholders in 

the Nigerian construction industry and built environment, yet its existence and effects are palpable. 

Hence, the study, via relevant literature and personal observations sought to provide; first, a theoretical 

understanding of the nature of construction externalities; its constituents or composition as well as its 

effects, and secondly, to point out the level of awareness on the part of stakeholders and the manner or 

extent to which they have been addressed or considered in Nigeria. Ultimately, this paper presents as a 

solution to efficient and balanced allocation of resources, realistic taxation and better economic 

planning by the Nigerian government; the need to apprise the citizenry of the benefits and adverse 

effects of construction externalities. 
 

Keywords: Built environment, Construction externalities, Construction industry, Construction stakeholders, Economic 

planning, Nigeria. 

 

http://creativecommons.org/licenses/by/3.0/


Economy, 2015, 2(3): 58-63 

 

 

 

 

59 

 

1. Introduction 
The construction industry is one of the most important sectors of the economy (Mu‟azu, 2002; Nigerian Institute 

of Building, 2002) and plays a vital role in meeting the needs of society and enhancing the quality of life. According 

to Ebohon and Rwelamila (2002) the construction sector, relative to its level of development accounts for more than 

60 percent of gross capital formation in most countries and defines the physical infrastructure upon which effective 

growth and development is achieved. Construction activities extend beyond the erection of houses, hospitals, 

schools, offices and factories to civil engineering works such as roads, bridges and communication infrastructure. 

For some time now, this song; of the significant position of the industry, its numerous benefits and contributions 

to users, beneficiaries and the economy at large has been sung, but little or no cognizance or attention has been paid 

to the fact that activities of the industry, as well as its products brings with it subtle, hidden and sometimes intangible 

effects on the social, economic, environmental life (Rodrigue, 2013) often termed externalities or neighborhood 

effects, or spillovers, which affect third parties or non users (Friedrich and Milton, n.d). 

The European Commission (2005) after an extensive research, opined succinctly, that externalities are related to 

social welfare and the economy in no small measure. It has also been defined as costs or benefits that result from an 

activity or venture that affects an otherwise uninvolved third party who did not choose to incur that cost or benefit 

(Externality, 2013). It is also regarded as an action by a person or firm which affects another person or firm and for 

which the interaction is ignored (Externality, n.d). 

According to Zakaree (2012)externalities may be positive (economic externalities) or negative(non-economic 

externalities). Positive externalities or beneficial externalities or external benefits or external economy are benefits 

enjoyed by a third party as a result of an activity or product. Such third parties include any individual, organization or 

property owner that is indirectly affected (Positive Externalities, n.d) while individuals who benefit from positive 

externalities without paying are considered „free riders‟. 

While positive externalities are the common thread that run through economic consideration of the environment 

(Positive Externalities, n.d) negative externalities are cost of economic activities like construction and housing 

activities that are imposed on others like environmental damages, cost of healthcare incurred as a result of pollution 

and many more. 

Positive externalities, such as better habitat, population dispersal, improved hygiene, decongestion, increased 

market value of properties (Externality, n.d) which provide considerable benefit to others which they do not pay for, 

will be in the best interest of the Nigerian government to promote. Government needs to compensate the initial 

propagators or construction firms or subsidize the clean and healthiest methods of construction and disposal of waste. 

This can give impetus to new working and disposal methods and technologies, which will in turn promote a more 

sustainable environment (European Commission, 2005). 

Negative externalities or external costs or external diseconomy are activities or products that impose a negative 

effect on the third party (Externality, 2013).It has also been defined as a cost that is caused by some economic 

activity but which is not paid for by the entities that are directly involved in the activity (Namish, n.d). Malpezzi 

(1996) outlines a number of negative externalities related to both housing and construction such as air, noise, water, 

soil pollution that cause green house emissions and climatic change which in turn affects humans, existing buildings 

and materials. Others, such as land takes, congestions, accidents, additional demand for civic amenities, falling real 

estate prices and many more. Such negative externalities have taken a huge toll on the Nigerian environment, such 

that adequate attention and consideration needs to be accorded it. 

Worthy of note is that externalities becomes a serious problem when such effects are not internalized or taxed or 

paid for ,especially when the actual or reasonable monetary cost is unknown or cannot be quantified thus, giving rise 

to inefficient allocation of overall resources (Quantifying Environmental Externalities, n.d). 

Compounding these problems, especially in the Nigerian economy, firstly is that externality issues are relatively 

unknown to a majority of the populace with little or no action taken when such effects lead to economic, social, 

health and environmental losses. Second, externality is known probably to a limited extent to appropriate public or 

government authorities, but defaulting construction firms are not charged appropriately with negative externality 

issues, because they are not included in the current construction tax system. Third, externalities are not compensated 

for or subsidized for compliant firms.  

Undoubtedly, construction consumes a large part of the resources of any nation. Considerable amounts of time, 

money and effort are spent by the Nigerian government in this sector. Such huge resources may however, not be 

entirely justified especially when the costs of negative externalities: costs of health, social, economic and 

environmental damages outweigh the benefits of construction or its products. 

The primary import of this study therefore, is to establish a theoretical basis for developing a way or ways of 

striking a fair balance (in economic terms) between the benefits of positive construction externalities and the adverse 

effects of the negative externalities. The research thus has the following as its focus: 

 Promoting Government, public and contractors awareness and providing an understanding on the 

existence and effects  of construction externalities to enable; first, the public to develop confidence to 

report to the appropriate authorities and secondly, to give the government better knowledge on how such 

externalities could be charged on defaulting firms and thirdly furnishing construction firms that adopt 

healthy and safe working methods with more information on the external benefits of their activities and 

the need to receive compensation or subsidies from the Government, thus encouraging them to develop 

better and cleaner working and disposal methods.  

 Providing a theoretical basis for further research in providing reliable statistics or procedures of 

quantifying and monetizing construction externalities for use by Nigerian tax authorities in making 

objective decisions in formulating construction tax or tax ceilings. In other words, to advance realistic 

procedures or methods via which negative construction externalities can be quantified or have monetary 

values attached with a view to obtaining reliable statistical data for realistic taxation and better economic 

planning. 



Economy, 2015, 2(3): 58-63 

 

 

 

 

60 

 

2. Problems of Construction Externalities in Nigeria 
In a developing country like Nigeria, the subject or issue of construction externalities is one that is relatively 

unknown to the average citizen, constructor and even the public authorities. This ignorance on the part of third 

parties have resulted in lack of confidence to report health, financial, environmental losses arising from negative 

construction externalities to the appropriate authorities. 

Negative construction externalities from the activities, working methods, disposal techniques of construction 

firms have consistently imposed considerable social, economic and environmental risks on the citizens, ecosystem, 

materials and the government. For instance, asphalt or bituminous plants, other construction plant or technologies, 

road stabilization techniques, methods of dumping demolition wastes, have led to innumerable health, emotional, 

psychological, economic risks and social vices like damage to human health, building fabric, and the ecosystem, 

squabble for basic civic amenities, accidents, increased crime rate to mention but a few which are not accounted for 

by contractors or construction entrepreneurs propagating such damages and as such has either not been internalized 

through penalties or the appropriate financial instruments such as taxation by the Federal Inland Revenue Service 

(FIRS) or reflected in the taxes already paid by these construction firms. 

The F.I.R.S and/or other similar authorities have no appropriate statistical data which could serve as a basis upon 

which charges could be calculated, thus no appropriate quantification or cost allocation of these negative externalities 

or valuation of the impacts in monetary terms. On the other hand, incentives for construction firms employing clean, 

healthy and environment friendly methods of working and disposal are either overlooked or inadequately 

compensated or their costs subsidized by the Government. 

 

3. Purpose of the Study 
The aim of this paper is to study the nature of construction externalities and how it has been addressed in the 

Nigerian construction environment. This is with a view to providing a theoretical understanding of the subject, as a 

basis for further research. The specific objectives include: 

i. To identify, via related literature, the various positive and negative construction externalities in 

existence, their makeup and effects. 

ii. To ascertain the drivers or factors that promotes negative externalities and the barriers or factors 

militating against positive externalities. 

iii. To examine, via personal observation and experience, the awareness level of construction stakeholders in 

Nigeria on the existence of externalities, its effects on the Nigerian built environment and the manner 

and/or extent which it has been handled by concerned stakeholders. 

 

4. An Overview of the Construction Industry  
4.1. Definition and Scope 

Various attempts have been made to define construction. For instance, Kunya et al. (2008) succinctly defined 

construction as the process whereby the designer‟s plans and specifications are converted into physical structures and 

facilities. It also involves the organization and coordination of all the resources in order to complete the project on 

schedule, within the budget and according to specified standards. It has also been defined as that which includes 

residential, industrial and public buildings, civil engineering construction works and the building materials industry. 

As a result of its assembly oriented nature, the industry is subdivided into two major groups: Building and Civil 

engineering. 

 

4.2. Organization  
The industry is essentially a large industry of small firms (Anigbogu, 2011). It embraces a wide range of loosely 

integrated organization that collectively constructs, alter and repair wide range of different buildings and engineering 

structures. The industry is a project based one, where firms undertake geographically dispersed projects for a long 

duration of time.  

The demand for construction projects is essentially what economists call a „derived‟ demand. It is derived from 

the need for buildings in which to live (houses), manufacture or store goods) warehouses and industries), study 

(schools), healthcare (hospitals), operate various services (offices) etc. The Government is also the client for a large 

number if its projects and can thus directly or indirectly use it to control the economy such as reduction in its capital 

expenditure, deliberate refusal to continue on-going projects, increasing interest rates and taxation (Anigbogu, 2011).  

 

4.3. Relevance 
“When the construction industry „sneezes‟, the whole nation catches the cold”. “The construction industry is the 

barometer with which economic growth is measured”. “The construction industry is the regulator of the nation‟s 

economy”. These are common expressions used to buttress the fact that the role of the construction industry in 

economic development cannot be overemphasized. 

For about three decades, the debate has been on, as to the role of the construction industry in socioeconomic 

development. A school of thought postulated a causal relationship between construction and economic growth. 

Accordingly, developed countries have a stronger construction industry (which contributes 5-8% to GDP) than less 

developed countries (where construction contributes 3-5% to GDP).The implication for development policy is that 

unless the construction industry grew faster than the economy as a whole, it might constrain national development 

(Anigbogu, 2011). 

Kolawole (2002) shares a similar view by surmising that the building industry operations is a unique one, as it 

provides the environment under which other industries operate. The industry is the largest in Nigeria and employs a 

good proportion of the work force. The construction sector can therefore be said to be strongly related to the state of 



Economy, 2015, 2(3): 58-63 

 

 

 

 

61 

 

health of the economy, since it contributes to national income, employment and economic stabilization. Its potential 

role as an agent for development, modernization, entrepreneurship is widely recognized. 

 

5. The Nigerian Construction Industry 
The Nigerian Construction Industry still plays an important role despite the fact that it is yet to meet the 

challenges of adequately providing the much desired social amenities such as educational, health care facilities, 

decent and affordable housing for its teeming populace. About 69% of the nation‟s fixed capital formation is 

produced by the construction industry (Federal Office of Statistics, 1998). This implies that the construction industry 

represents nearly 70% of the capital base of the national economy and is an indication of the significance of the 

industry within the economy (Faniran, 1999). 

According to Olaloku (1987) the industry occupies an important position in the structure of the Nigerian 

economy. The relatively large investment commitment to construction makes the industry an important source of 

demand generation and this multiplier effect i.e. the great capacity to generate employment, income and expenditure 

in other sectors of the economy constitutes a major contribution to the economy  

Existing data on the building and construction sector of the Nigerian Economy are grossly inadequate. However, 

past statistics revealed that the sector contributed to the growth and development of the economy. From a GDP of 

3.8% in 1960.The sector‟s national output rose to 4.22% in 1965, 4.38% in 1970 and 5.70% in 1975 (Anyanwu, 

1977). This further highlights the fact that the construction industry continues to be a major stimulant in the 

country‟s economic growth. Over the last decade, several changes have occurred in Nigeria, which have helped all 

sectors of the economy, especially the building & construction sector. With double digit growth rates in the last 3 

years, the construction industry has outgrown all other sectors of the Nigerian economy. However, its contribution to 

the Nigerian GDP and employment of labor are still very low.   

Despite its significant position, the industry was rated poor in its performance .According to World Bank 

statistics the construction industry of developing nations ought to contribute between 3% and 8% to GDP (World 

Bank 1984), the contribution of construction to Nigeria‟s GDP has stood steadily at about 2% (FOS, 1998).Further 

studies by the World Bank (1984) revealed that the contribution of the industry to employment in developing nations 

averages about 3.2%, but the Nigerian construction industry contributes only 1% (FOS, 1998). The poor performance 

of the Nigerian construction industry has generally been blamed on the overall state of the economy.       

 

6. Construction Externalities 
6.1. Definition and Explanation of the Concept 

Externalities are side effects or consequences of an industrial or commercial activity that affects other parties 

without it being reflected in the cost (Externality, n.d). A couple of important aspects of this definition are worth 

explaining. First and foremost, an externality does not necessarily arise whenever there is some interaction between 

people's activities. What makes the interaction an externality is that the interaction is not internalized, i.e. what 

makes an externality an externality is that the parties to the externality do not take account of their interaction 

(Externality, n.d). If a construction firm dumps some of its demolition waste on someone else's property, it is not an 

externality if the firm has negotiated an agreement with the owner of the neighboring property. Affecting someone 

else, and neglecting this effect, is the externality problem. 

Externality (n.d) further explains that externality can occur among people, or among firms, or between people 

and firms. For instance if one construction firm's training of its workers benefits other firms who might later hire 

some of those workers, it is an externality between firms. A construction firm's training of workers benefitting some 

other firms is an example of a positive externality: the more training the first firm undertakes, the higher the profits 

of the other firms will be. There still is an externality problem when the externality is beneficial: as long as one firm's 

(or person's) actions affect another firm or person, and these effects are not internalized, then there will be an 

externality problem, and the overall allocation of resources in the economy will be inefficient. 

Externalities could also be reciprocal: the wastes disposed from firm 1's production might lower the profits of 

firm 2. Reciprocal externalities do not cancel : there will be an externality problem here if these effects are not 

internalized, even if the damage done by firm 1 to firm 2 is exactly the same magnitude as the damage done by firm 

2 to firm 1. 

A classic example of an externality is pollution. This of course is a negative externality. The effects of the 

polluting firm's production are a reduction in the utility of people subject to the pollution. If a firm producing a 

negative externality is not charged for the harm its activities impose on others, then it will undertake those activities 

at a higher level than is efficient. On the other hand, if a firm producing the positive externality is not paid for the 

benefits its activities impose on others, then it will undertake those activities at a lower level than is efficient. 

There are two main theoretical points about externalities: One, there is an efficiency problem, that the 

competitive equilibrium is not optimal, whether the externality is positive or negative, if it is not internalized 

properly. Two, the problem stems from the fact that the agent producing the externality does not face prices that 

reflect all the consequences of its actions. 

 

6.2. Salient Terms and Composition 
In strict economic parlance, externalities are non-market exchange in which one or more parties to the exchange 

are not compensated and may have little choice in the exchange. Externality is a broader term which includes 

residuals, intangibles, and incommensurables (QEE, n.d) which includes the following: 

(i) Residuals: Waste products (i.e. pollution) created during the operation processes necessary to deliver 

goods and service to the consumer or beneficiaries.  

Example, carbon monoxide pollution created by running construction plant and machinery. 



Economy, 2015, 2(3): 58-63 

 

 

 

 

62 

 

(ii) Intangibles: A good, service, or effect of an action that cannot be assigned monetary values; cultural or 

personal values, emotional, psychological, aesthetic effects, which cannot be measured in monetary 

terms. Compensation for destruction of a religious facility or spiritually significant place. An extreme 

example is loss of human life which is impossible to assign a monetary value. 

(iii) Incommensurable: These are effects of a given action or activity that can, with some effort, be assigned 

monetary value. Example is the Cost of monitoring sulfur dioxide, carbon monoxide pollution created by 

running construction plants and  manufacturing raw materials. 

 

6.3. Positive Externalities 
Walter (1983) clearly provides a common example of road way construction, which is an instance of a positive 

externality. He argues that any entrepreneur or contractor who constructs a road will have to bear all the costs (of 

labour, materials, plant, etc.), just as in any business, but since highways are an external economy, he will be unable 

to reap rewards proportional to the benefits provided. For example, benefits would spill over to those who own land 

near the highways, in the form of increased value (i.e., the road builder cannot charge the beneficiaries for these 

gains). Other benefits would he enjoyed, for free by people who simply prefer more and more highways. Nor could 

the road owner exclude from increased benefits those who gain from the resulting cheaper transport in the form of 

lower prices for shipped merchandise.  

This argument by Walter (1983) is sometimes put forth in terms of social and private returns. Private returns-the 

difference between the outlay and revenue which accrue entirely to the individual entrepreneur-are said to be lower 

than social returns-the difference between the costs and the benefits for society as a whole. In both cases, the 

contractor must pay the full costs (labour, materials, risks and overheads) of the highway construction, but it is 

possible only for society as a whole to derive the full benefits. The contractor, being limited to the tolls he can 

collect, is unable to capture the gains in terms of increased land values, etc., which spill over onto the remainder of 

the population. Given this alleged tendency of the market to under invest in highways, the argument from 

externalities concludes that it is the government's obligation to correct matters by subsidizing road building, or, more 

likely, by building roads itself. 

 

6.4. Negative Externalities 
According to Namish (n.d) a major externality associated with road construction is the pollution that is caused by 

the use of automobiles. As more roads are built, more cars use them, as more cars use them; more pollution occurs 

and impacts people who do not use the roads. A similar impact is excessive noise. If for example a large road is built 

near ones house, one will bear the cost of having to deal with all the extra noise even if one does not use the road. Air 

and noise pollution are the two major negative externalities associate with building of roads. 

The cause of the increase in air pollution is the fact that a large number of trees may have to be cut when new 

roads are being laid. The new roads may also have to be built through wooded areas which results in getting wild life 

disturbed, locals losing ancestral lands and many more. The construction of roads requires raw materials like tar, 

cement, concrete etc, the production and usage which cause high negative externality of pollution. 

 

7. Conclusion and Recommendations 
From the foregoing elaboration of the nature, effects and composition of construction externalities, there is the 

need for the general public to acquaint themselves with proper understanding of the nature of construction 

externalities to help them develop confidence in reporting to the appropriate or concerned environmental authorities 

when such externalities arise. Construction or built environment stakeholders should also be knowledgeable in the 

subject to enable them apply it in their working and disposal methods. Lastly, the government, especially the 

environmental and tax authorities need to take cognizance or be well versed in externality issues to equip them with 

the necessary expertise in monetizing/taxing realistically and/or quantifying externalities, achieving a balanced and 

efficient allocation of economic resources and ultimately, better economic planning. 

 

References 
Anigbogu, A.I., 2011. Construction and economic development. Lecture Notes: M.Sc. Construction Management Class, Department of 

Building, University of Jos. 

Anyanwu, J.C., 1977. The structure of the Nigerian economy. Onitsha: Joanee Educational Publishers. pp: 1960 – 1977. 

Ebohon, O.J. and P.D. Rwelamila, 2002. Sustainable construction in Sub Saharan Africa: Relevance, rhetoric and the reality. Agenda 21 for 

Sustainable Construction in Developing Countries, 1(1): 1- 16. 

European Commission, 2005. Extern E; externalities of energy, methodology update. Other impacts: Ecosystems and biodiversity. In Peter, B. 

and Rainer, F. (Eds.). Luxembourg: Office for Official Publications of the European Communities. pp: 229–237. 

Externality, 2013. In wikipedia, the free encyclopedia. Available from en.wikipedia.org/wiki/externality. 

Externality, n.d. Available from answers.yahoo.com/question/index. 

Faniran, O.O., 1999. The role of construction project planning in improving project delivery in developing countries: A case study of the 

Nigerian construction industry. Australia: Deakin University Press. 

Federal Office of Statistics, 1998. Review of the Nigerian economy. Abuja: Author. 

Friedrich, H. and F. Milton, n.d. Externality. In wikipedia, the free encyclopedia. Available from en.wikipedia.org/wiki/externality. 

Kolawole, A.M., 2002. The functions of builders in building construction companies. Paper Presented at the 32nd Annual Conference/General 

Meeting of the Nigerian Institute of Building on Building Production Management Held at Maiduguri, Borno state. 

Kunya, S.U., I.U. Hussaini and M.I. Yusufu, 2008. Appraising the causes of inflated costs of public construction projects in North-East 

Nigeria. Nigerian Journal of Construction Technology and Management, 9(1): 72 -81. 

Malpezzi, S., 1996. Housing prices, externalities and regulation in U.S metropolitan areas. Journal of Housing Research, 7(2): 209–241. 

Mu‟azu, D.A., 2002. The role of the professional builder in the Nigerian construction industry. ATBU Journal of Environmental Sciences, 

1(1): 29 -31. 

Namish, A., n.d. Negative externalities associated with construction of roads. Available from www.enotes.com/homework-help. 

Nigerian Institute of Building, 2002. Handbook of the N.I.O.B. Lagos: Author. 

Olaloku, F.A., 1987. The second tier foreign exchange market and the construction industry in Nigeria: Options and challenges. The Quantity 

Surveyor, 4(1): 4 – 8. 

http://www.enotes.com/homework-help


Economy, 2015, 2(3): 58-63 

 

 

 

 

63 

 

Positive Externalities, n.d. Available from www.economicsonline.co.uk [Accessed September 7, 2013]. 

Quantifying Environmental Externalities, n.d. Available from www.externalities.net. 

Rodrigue, J.P., 2013. The environmental impacts of transportation. Available from 

people.hofstra.edu/geotrans/eng/ch8en/conc8en/ch8c1en.html [Accessed September 7, 2013]. 

Walter, B., 1983. Public goods and externalities: The case of roads. Journal Libertarian Studies, 7(1): 1 – 34. 

World Bank, 1984. The construction industry: Issues and strategies for developing countries. Washington D.C: Author. 

Zakaree, S., 2012. Externalities of urban redevelopment: Eviction, relocation and compensation in Nigeria. International Journal of Business 

and Social Science, 3(5): 272– 278. 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Views and opinions expressed in this article are the views and opinions of the authors, Economy shall not be responsible or answerable for any loss, damage 

or liability etc. caused in relation to/arising out of the use of the content. 

 

http://www.economicsonline.co.uk/
http://www.externalities.net/

