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An externality is an effect that an economic transaction has on a party who is not involved in the transaction.[1] 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:

See Also


  1. A. Goolsbee, S. Levitt and C. Syverson. Microeconomics. New York: Worth Publishers, 2013, pp. 645.