What is the definition of an externality?

1 Answer
Jan 28, 2016

An externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

For example, imagine if an area were heavily polluted. Even though a farmer had nothing to do with the creation of the pollution, they are still negatively impacted by its presence.

Externalities can have negative or positive impact.