externality
eck-ster-NAL-uh-tee
/ˌɛk.stɜːrˈnæl.ə.ti/
A side effect or consequence of an economic activity that affects third parties who did not choose to incur that cost or benefit.
Can be negative (e.g., pollution affecting public health) or positive (e.g., herd immunity from vaccinations).
The story behind the word. Coined in 20th-century economic discourse by joining Latin 'externus' (outside) with the nominal suffix '-ity'. It describes impacts that land outside the balance sheet of the transacting parties.
Word relationships
- side effect: 'Side effect' is informal and medical; 'externality' is a precise economic term for unpriced external impacts.
- spillover: 'Spillover' is often used synonymously, but 'externality' explicitly highlights market failure and unpriced costs/benefits.
- internal cost: An 'internal cost' is directly absorbed by the producer or consumer involved in the transaction.
Commonly confused with
- outlier: An 'outlier' is a statistical data point far from others; an 'externality' is an unpriced third-party economic effect.
Word family
- externalize (verb): To shift costs or burdens onto external parties.
Collocations
- negative externality
- positive externality
- internalize an externality
- environmental externality
Idioms & expressions
- spillover effect
Example sentences
- "Industrial air pollution is a classic negative externality where market prices fail to reflect environmental damage." Environmental economics textbook
- "Routine vaccinations generate a massive positive externality by reducing community-wide disease transmission." Public healthcare research
Memory hook
EXTERNAL-ity happens to people OUTSIDE the financial contract. Effects landing outside the economic deal.
When not to use
Do not use to describe internal expenses directly paid by the buyer or manufacturer.
Fun facts
- Arthur Pigou proposed taxing negative externalities, giving birth to what economists today call 'Pigouvian taxes'.
Related words
Explore more words
consequence, byproduct, footprint, overconsumption, consequential, Anthropogenic
Also appears in
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