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Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

Pollution is an obvious example of a negative externality, also termed an external diseconomy. Chemicals dumped by an industrial plant into a lake may kill fish and plant life and affect the livelihood of fishermen and farmers nearby.

In contrast, a positive externality or external economy may arise from the construction of a road which opens a new area for housing, commercial development, tourism, etc. The invention of the transistor generated numerous positive externalities in the manufacture of modern telecommunication, stereo and computer equipment. Externalities arise when property rights cannot be clearly assigned.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Externalities - SNA
Market failure


Version Indicator: OECD

Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Wednesday, March 5, 2003