Finance glossary
Externality
Definition
A cost or benefit affecting third parties not involved in a transaction.
An externality is a side effect of economic activity borne by people outside the deal. Pollution is a negative externality; a neighbor well-kept garden is a positive one. Because markets ignore them, governments use taxes, subsidies, or regulation to correct the imbalance.
In a sentence
Factory pollution is a negative externality, imposing costs on neighbors who had no part in the sale.
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