Externalities
Definition
Externalities are the unintended consequences of economic activities that affect third parties who are not involved in the transaction. They can be positive (beneficial) or negative (harmful).
Analogy
Imagine you live next to a bakery. The delicious smell of freshly baked bread is a positive externality because it brings joy to your day, even though you didn't buy any bread.
Related terms
Market Failure: When markets fail to allocate resources efficiently due to externalities or other reasons.
Positive Externality: A beneficial impact on third parties resulting from an economic activity.
Negative Externality: A harmful impact on third parties resulting from an economic activity.
"Externalities" appears in:
Subjects (1)
Study guides (3)
Additional resources (1)
Practice Questions (1)
- A graph showed MSB above MPB—what type of externalities is this?
Resources
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