AskDefine | Define externality

Dictionary Definition

externality n : the quality or state of being outside or directed toward or relating to the outside or exterior; "the outwardness of the world" [syn: outwardness] [ant: inwardness]

User Contributed Dictionary



  1. The state of being external or externalized.
  2. A thing that is external relative to something else.
  3. A financial consequence of an economic act that is felt by an unrelated third-party.


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.
externality in Catalan: Externalitat
externality in Czech: Externalita
externality in Danish: Eksternaliteter
externality in German: Externer Effekt
externality in Spanish: Externalidad
externality in Esperanto: Ekstera efiko
externality in French: Externalité
externality in Italian: Esternalità
externality in Hebrew: השפעה חיצונית
externality in Lithuanian: Eksternalitetas
externality in Dutch: Externaliteit
externality in Japanese: 外部性
externality in Norwegian: Eksternaliteter
externality in Polish: Efekty zewnętrzne
externality in Portuguese: Externalidade
externality in Russian: Экстерналия
externality in Slovak: Externalita
externality in Finnish: Ulkoisvaikutus
externality in Swedish: Extern effekt
externality in Vietnamese: Ảnh hưởng ngoại lai
externality in Chinese: 外部性
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