externality
ek-ster-NAL-uh-tee
/ˌɛkstərˈnælɪti/
A consequence of an industrial or commercial activity that affects other parties without this being reflected in official market prices.
Refers specifically to third-party impacts (positive or negative) that fall outside the private pricing mechanism.
The story behind the word. Coined by mid-20th-century economists building on Alfred Marshall's work, from Latin 'externus' meaning outward or foreign. It was created to formalize how private choices create unbilled burdens or gifts for the outside world.
Word relationships
- side effect: Side effect is informal and general, whereas externality specifically implies an unpriced economic impact on a third party.
- internal cost: An internal cost is directly borne by the transaction participants and accounted for in the market price.
Commonly confused with
- spillover: Externality is the formal theoretical term; spillover is a broader term often used for regional or secondary effects.
Word family
- externalize (verb): To shift costs or benefits onto outside parties.
- externalization (noun): The process of shifting costs or benefits to third parties.
Collocations
- negative externality
- positive externality
- internalize an externality
Example sentences
- "Factory pollution represents a negative externality because surrounding residents bear health costs without compensation." Environmental policy analysis
- "Widespread vaccination creates a positive externality by reducing community transmission for everyone." Public health discussion
Memory hook
Think of EXTERNAL impact on bystanders who were not part of the deal. External impact, unpaid bill.
When not to use
Do not use to describe direct, intended internal costs or contractually negotiated outcomes.
Fun facts
- Arthur Pigou was among the first economists to systematically categorize external impacts in his 1920 book 'The Economics of Welfare'.
Related words
Explore more words
consequence, byproduct, footprint, overconsumption, consequential, Anthropogenic
Also appears in
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