Production Externality

AAA

DEFINITION of 'Production Externality'

Costs of production that must ultimately be paid by someone other than the producer of a good or service. Production externalities are usually unintended and can have economic, social and environmental side effects. Production externalities can be measured in terms of the difference between the actual cost of production of the good and the real cost of this production to society at large.

INVESTOPEDIA EXPLAINS 'Production Externality'

There are many examples of externalities, such as pollution and depletion of natural resources. A logging company can pay for the cost of a tree that they remove, but the cost of replacing an entire forest once it is gone is exponentially more than the sum of its lost trees. Freeway traffic jams and health problems that arise from breathing secondhand smoke are further examples of externalities in production.

RELATED TERMS
  1. Working Capital

    This ratio indicates whether a company has enough short term ...
  2. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  3. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  4. Reproduction Cost

    The costs involved with identically reproducing an asset or property ...
  5. Factors Of Production

    An economic term to describe the inputs that are used in the ...
  6. Gross Production Tax

    A state tax imposed on companies that generate revenues by depleting ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Investing Basics

    Economic Indicators That Do-It-Yourself Investors Should Know

    Understanding these investing tools will put the market in your hands.
  3. Options & Futures

    Harvesting Crop Production Reports

    Find out what grain investors need to know to analyze USDA reports.
  4. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  5. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  6. Fundamental Analysis

    What is Gearing?

    Gearing, also called leverage, is the degree to which a company’s operations are funded by lenders versus shareholders.
  7. Economics

    Understanding Money Supply

    Money supply – also called money stock -- refers to the total amount of currency and other liquid financial products in an economy at a particular time.
  8. Economics

    What is a Wholly Owned Subsidiary?

    A company whose common stock is 100% owned by another company, called the parent company.
  9. Economics

    Understanding Specialization

    Specialization is when a person, business, or region focuses their productive efforts on a smaller subset of a larger system for a competitive advantage.
  10. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center