Okuzeka
Economics vocabulary · Markets, Supply and Demand

Externality

Meaning in economics, with examples

/ˌekstɜːˈnæləti/nounCommon term

In economics, externality means: A cost or benefit of an activity that falls on people who are not part of the deal and is not reflected in the market price.

In Turkish: dışsallık

How it is used

A key reason for market failure. Pollution is the classic negative externality, while education and vaccination create positive externalities. Governments try to correct or internalise externalities with taxes (such as a carbon tax), subsidies or regulation.

Example sentences

  1. Traffic congestion is a negative externality: each extra driver slows down everyone else.

  2. A carbon tax makes polluters pay for the externality they create.

Common collocations

  • negative externality
  • positive externality
  • correct an externality
  • internalise externalities
  • market failureA situation in which a free market, left alone, does not produce an efficient outcome for society, so too much or too little of something is produced.
  • public goodA good that people cannot easily be stopped from using and whose use by one person does not reduce what is left for others, such as street lighting.
  • taxationThe system by which a government collects money from people and businesses through taxes on income, profits, spending and property.
  • subsidyMoney or other support that a government gives to producers or consumers to lower the price of a product or to encourage an activity.
  • sustainable developmentEconomic and social progress that improves living standards today while protecting the environment and natural resources, so that future generations can also meet their needs.

More terms: Markets, Supply and Demand

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This page explains English vocabulary for learners. It is not financial advice.