Discipline: Economics

Conceptualized by HENRY SIDGWICK (1838-1900) and Alfred Marshall (1842-1924), and later developed by Arthur Cecil Pigou (1877-1959), externalities are favorable or unfavorable effects of the actions of market participants on others.


When your neighbor builds a very large and beautiful garden next to yours, that would be a favorable externality for you, since you can also view it from your home.

In contrast, when a factory pollutes the air, that would be an unfavorable externality for the people who live in that neighborhood.

Also see: coase theorem, compensation principle, consumer surplus, cost-benefit analysis, social welfare function


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