Externality

An impact (which might be positive, but more frequently negative) that is caused by the action of someone else, who will often see a benefit (but it could be a disadvantage) from the action. A good example is that of increasing health care and environmental remediation costs caused by pollution from fossil fuel production and use. The full and often extensive costs of the pollution are borne by society, whilst the producer is able to maintain and improve profitability. To better reflect the true and full costs of a product then these external (which are essentially hidden) costs should be reallocated to the producer.

Whilst many external costs are often ignored due to complexities of determining where a realistic boundary should be set for allocating costs, this should not preclude them from being considered within a wider evaluation, for example in a cost-benefit analysis, or similar. Another example might also be within a sustainability report for a sports pitch: providing an estimating of impacts from the transport of good for the maintenance of pitch should at least be highlighted as a negative externality, even without monetary values attached. This could include noise pollution, increase potential for road accidents, traffic congestion, increased road pollution from diesel engines, damage to roads from heavy lorries, or disruption to local neighbourhoods.

A positive externality can be through improved education and training, which can (or should) result in increasing productivity, quality of output, an improved salary, as well as improving motivation for their job role an employee retention, thereby reducing recruitment costs. This should also mean more taxes and insurances paid, which is then used (or supposed to be) by Government for the public good. In addition, there should be a reduction in workplace injuries as the risk of being injured should be reduced as an individual should be more aware of risk reduction and mitigation. This would have an impact on health services as there would be a reduced need for them from some individuals, thereby easing the pressure on overstretched services.