Definition of Externality

Definition: An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account.

Classic example of a negative externality: pollution, generated by some productive enterprise, and affecting others who had no choice and were probably not taken nto account.

Example of a positive externality: Purchase a car of a certain model increases demand and thus availability for mechanics who know that kind of car, which improves the situation for others owning that model.

Terms related to Externality / Externalities:

• Network Externalities
• Market Failure
• Real Externality
• Pecuniary Externality

About.Com Resources on Externality / Externalities:

• What is Wrong with the Coase Theorem?
• Pigovian Taxes - Joining the Pigou Club
• If Banning Incandescent Light Bulbs Saves Money, Is It Good Public Policy? No.

Writing a Term Paper? Here are a few starting points for research on Externality / Externalities:

Books on Externality / Externalities:

• Naked Economics: Undressing the Dismal Science
• The Theory of Externalities, Public Goods, and Club Goods
• Public Goods, Environmental Externalities and Fiscal Competition

Journal Articles on Externality / Externalities:

• Network externalities, competition, and compatibility
• Technology adoption in the presence of network externalities
• Keeping up with the Joneses: Consumption externalities, portfolio choice, and asset prices