Economic Externality

An Economic Externality is an effect on value to a third party (who did not choose to incur that cost or benefit).

• Context:
  • It can range from being a Positive Externality to being a Negative Externality (such as water pollution).
  • …
• Counter-Example(s):
  • an Economic Internality.
• See: Economic Decision, Economic Transaction, Public Safety, Pigovian Tax.

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References

2014

• (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/externality Retrieved:2014-1-19.
  • In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of an individual who chooses to fire-proof his home may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the imputed monetary value of benefits and costs to all parties involved. Thus, it is said that, for goods with externalities, unregulated market prices do not reflect the full social costs or benefit of the transaction.

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