An externality is an effect that an economic transaction has on a party who is not involved in the transaction. Externalities deter a market from producing the equilibrium quantity and price for a good for service. Externalities produce inefficiencies in markets and can eventually produce a market failure if not internalized in time.
Externalities can be either positive or negative:
- A. Goolsbee, S. Levitt and C. Syverson. Microeconomics. New York: Worth Publishers, 2013, pp. 645.