What is Externality?

Category: Economics

1Definition

A cost or benefit that affects parties not directly involved in a transaction.

2Context

Pollution is a negative externality; education creates positive externalities.

3Example

A factory's pollution harms neighbors who weren't part of the production decision.

⚠Common Trap

Markets don't naturally account for externalities—that's why we have environmental regulations.

More Economics Terms

Get clear definitions without the jargon