AskDefine | Define externalities

User Contributed Dictionary



  1. Plural of externality

Extensive Definition

In economics, an externality is an impact (positive or negative) on any party not involved in a given economic transaction.
An externality occurs when a decision causes costs or benefits to third party stakeholders, often, although not necessarily, from the use of a public good. In other words, the participants in an economic transaction do not necessarily bear all of the costs or reap all of the benefits of the transaction. For example, manufacturing that causes air pollution imposes costs on others when making use of public air. In a competitive market, this means too much or too little of the good may be produced and consumed in terms of overall cost or benefit to society, depending on incentives at the margin and strategic behavior.
In the absence of significant externalities, parties to an economic transaction are assumed to benefit, improving the overall welfare of society. If third parties benefit substantially, such as in areas of education or safety, the good may be under-provided (or under-consumed); if costs to the public exceed costs to the economic decision makers, such as in pollution, the good may be over-provided, in terms of overall benefit or cost to society. Here, overall benefit and cost to society are defined as the collective economic utility for society.


  • Definition
  • Baumol, W.J. (1972), ‘On Taxation and the Control of Externalities’, American Economic Review, 62(3), 307-322.
externalities in Catalan: Externalitat
externalities in Czech: Externalita
externalities in Danish: Eksternaliteter
externalities in German: Externer Effekt
externalities in Spanish: Externalidad
externalities in Esperanto: Ekstera efiko
externalities in French: Externalité
externalities in Italian: Esternalità
externalities in Hebrew: השפעה חיצונית
externalities in Lithuanian: Eksternalitetas
externalities in Dutch: Externaliteit
externalities in Japanese: 外部性
externalities in Norwegian: Eksternaliteter
externalities in Polish: Efekty zewnętrzne
externalities in Portuguese: Externalidade
externalities in Russian: Экстерналия
externalities in Slovak: Externalita
externalities in Finnish: Ulkoisvaikutus
externalities in Swedish: Extern effekt
externalities in Vietnamese: Ảnh hưởng ngoại lai
externalities in Chinese: 外部性
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