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'''Externalities''' are the effects a transaction has on individuals or firms not part of the transaction. Externalities may be positive or negative. [[Pollution]] is an example of a negative externality: a factory may produce pollution at the same time as it produces goods to be sold, but if the buyer of the goods is not harmed by the pollution, the factory will have no incentive to reduce or eliminate it. The pollution then becomes a negative externality affecting other individuals, who had not conducted any business with the factory.

'''Externalities''' are the effects a transaction has on individuals or firms not part of the transaction. They are usually considered to be a [[market failure]]. Externalities may be positive or negative. [[Pollution]] is an example of a negative externality: a factory may produce pollution at the same time as it produces goods to be sold, but if the buyer of the goods is not harmed by the pollution, the factory will have no incentive to reduce or eliminate it. The pollution then becomes a negative externality affecting other individuals, who had not conducted any business with the factory.

In mathematical economics, an externality exists when the marginal [[cost]] (or benefit) is not the same as the marginal social cost (or benefit) for some good, where the marginal social cost is the marginal cost for the private actor plus the marginal value of effects on bystanders to the transaction.

In mathematical economics, an externality exists when the marginal [[cost]] (or benefit) is not the same as the marginal social cost (or benefit) for some good, where the marginal social cost is the marginal cost for the private actor plus the marginal value of effects on bystanders to the transaction.