Externality

An externality occurs in economics when a decision (for example, to pollute the atmosphere) causes costs or benefits to stakeholders other than the person making the decision. In other words, the decision-maker does not bear all of the costs or reap all of the gains from his action. As a result, in a competitive market too much or too little of the good will be consumed from the point of view of society. If the world around the person making the decision benefits more than he does (education, safety), then the good will be underconsumed by individual decision makers; if the costs to the world exceed the costs to the individual making the choice (pollution, crime) then the good will be overconsumed from society's point of view.

Related Topics:
Economics - Stakeholders

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