Externality

noun (countable/uncountable)

/ˌɛkstəˈnælɪti/

A cost or benefit experienced by a third party not directly involved in an economic transaction, which is not reflected in the market price of the good or service; a form of market failure. Negative externalities (e.g., industrial pollution, carbon emissions) lead to overproduction relative to the social optimum; positive externalities (e.g., vaccination, education) lead to underproduction. In India, Pigouvian taxes — such as the National Clean Energy Cess (now GST Compensation Cess on coal) and Green Tax on old vehicles — are instruments to internalise negative externalities.

✍️ Usage in a UPSC answer

India's coal cess, levied since 2010 and restructured under the GST compensation framework, is a textbook Pigouvian instrument designed to make thermal power producers internalise the negative externalities of carbon emissions and local air pollution.

Synonyms

spillover effectthird-party effectsocial cost/benefitside effectneighbourhood effect

Antonyms

private costinternal costno spillovermarket-internalised effect

🌱 Word Family

external (adjective), externalise (verb), internalise (verb, antonymic action), externalities (plural noun), Pigouvian tax (related noun phrase)

🔡 Root

Latin externus = outside, external + -ality = quality noun suffix

📜 Etymology

From Latin externus (outward, foreign), from exter (outside). The economic concept was formalised by A.C. Pigou in The Economics of Welfare (1920), where he distinguished 'marginal social net product' from 'marginal private net product' to capture third-party effects. The noun 'externality' was popularised in post-war microeconomics and public finance literature.

🧠 Memory Hook

EXTERN-ALITY — the word EXTERN means OUTSIDE. An externality is a cost or benefit that FALLS OUTSIDE the private deal, landing on innocent bystanders. A factory's smoke drifts OUTSIDE its walls onto your lungs.

💰 Indian Economy 📖 Seen in: Indian Economy — Growth, Planning & De...

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