Externality

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Definition

1.

From the Wikipedia at http://en.wikipedia.org/wiki/Externality

"In economics, an externality is a side effect from one activity which has consequences for another activity but is not reflected in market prices. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

An externality occurs when a decision causes costs or benefits to stakeholders other than the person making the decision, often, though not necessarily, from the use of common goods (for example, a decision which results in pollution of the atmosphere would involve an externality). In other words, the decision-maker does not bear all of the costs or reap all of the gains from his or her action. As a result, in a competitive market too much or too little of the good will be consumed from the point of view of society. "


2.

"An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.' Mead (1973)

An externality exists when one individual's production (or consumption) affects the production process (or well-being) of another, in the absence of any market transaction between them.

Externalities may be positive (conferring benefits) or negative (imposing costs). They may also be either uni-directional (where A imposes an externality on B, but B does not on A), or bi-directional (where A imposes an externality on B, and B likewise on A)." (http://appropriatesoftware.net/wiki?PositiveExternality)


Discussion

David Bollier:

"“Economic externalities” are another set of costs that are not borne by buyers and sellers, but instead shifted to the commons. It is typically cheaper for a company to dump pollution into the atmosphere and to dump radioactive wastes in the ground than to clean them up (or “internalize” the costs). These economic externalities are unacknowledged costs of market activity – costs that are typically borne by the commons.

A commons-based economics, then, would take proper account of the full costs of market activity by recognizing its hidden subsidies and unacknowledged (social, environmental and moral) externalities." (http://www.boell.org/downloads/Bollier_Commons.pdf)