DEFINITION of 'Externality'

A consequence of an economic activity that is experienced by unrelated third parties. An externality can be either positive or negative.


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BREAKING DOWN 'Externality'

Pollution emitted by a factory that spoils the surrounding environment and affects the health of nearby residents is an example of a negative externality. An example of a positive externality is the effect of a well-educated labor force on the productivity of a company.

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    British economist Arthur C. Pigou advanced the theory of economic externalities, which he most notably expressed in his book, ... Read Full Answer >>
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