externality

externality, externalities

In economic theory it is generally recognized that some of the costs and benefits of economic activities (production, exchange, and the like) are not reflected in market prices. So, for example, air pollution caused by the activity of a company may be experienced as a cost by local residents or by society as a whole, but since clean air does not figure in the costs of production as calculated by the company, the latter has no incentive to reduce its polluting activity. Such costs and benefits which are not expressed in market prices are termed ‘externalities’. Policy problems implicit in social and environmental externalities in market economies are conventionally addressed by economists in the form of strategies for assigning market values to non-market variables and so ‘internalizing’ them, for example through taxation of pollution or scarce-resource use. Recent developments in environmental economics tend to exhibit the limitations of the concept of externality in the face of the systemic character of environmental-economic interactions (see, for example, Economics, Natural-Resource Scarcity and Development, 1989).