Externality

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:

• Positive externality
• Negative externality

See Also

• Market failure
• Pollution
• Deadweight loss