Toto: Created English encyclopedia entry on Externality following Wikipedia-style standards

2026-10-06T04:13:20Z

Created English encyclopedia entry on Externality following Wikipedia-style standards

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An '''externality''' is a cost or benefit that arises from the production or consumption of a good or service but falls on a third party who is not directly involved in the transaction. Because externalities are not reflected in market prices, they cause the market to produce an inefficient quantity of the good or service.<ref name="wiki">Wikipedia contributors, "Externality".</ref>

== Definition ==

An externality occurs when the actions of one party affect the well-being of another party without that effect being priced or compensated. Externalities may be '''negative''' or '''positive''', and may arise from either production or consumption.<ref name="wiki"/>

== Types ==

{| class="wikitable"
! Type
! Description
! Example
|-
| Negative production externality
| A production cost borne by third parties.
| Pollution from a factory.
|-
| Positive production externality
| A production benefit enjoyed by third parties.
| A firm's research benefiting other firms.
|-
| Negative consumption externality
| A consumption cost borne by third parties.
| Second-hand smoke from smoking.
|-
| Positive consumption externality
| A consumption benefit enjoyed by third parties.
| Immunisation reducing disease spread.
|}

== Consequences ==

In the presence of a negative externality, the market produces ''too much'' of the good, because producers do not bear the full social cost. In the presence of a positive externality, the market produces ''too little'', because producers do not capture the full social benefit. In both cases, the market outcome diverges from the socially efficient level.<ref name="wiki"/>

== Remedies ==

Economists have proposed several approaches to internalise externalities:

* '''Pigouvian taxes and subsidies''' — taxes on activities generating negative externalities and subsidies for those generating positive externalities.
* '''Cap-and-trade''' and other market-based mechanisms.
* '''Direct regulation''' of the activity.
* '''Property rights and bargaining''', as suggested by the [[Ronald Coase|Coase]] theorem, which shows that private parties can sometimes resolve externalities through negotiation if property rights are well defined and transaction costs are low.

== See also ==

* [[Market Failure]]
* [[Public Goods]]
* [[Pigouvian tax]]
* [[Public Economics]]
* [[Welfare Economics]]

== References ==

<references />

[[Category:Economics]]
[[Category:Market failure]]
[[Category:Microeconomics]]

Externality - Revision history

Toto: Created English encyclopedia entry on Externality following Wikipedia-style standards