Externality
Definition. An externality is a cost or benefit imposed on third parties who are not directly involved in the production or consumption of a good, and which is not reflected in the market price. Because these spillover effects are not accounted for by the decision maker, the market outcome diverges from the socially optimal level.
A negative externality such as pollution leads to overproduction, while a positive externality such as education leads to underproduction relative to the socially efficient quantity.
This term belongs to Externalities in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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