Externality

Externality has been, and is, central to the neo-classical critique of market organisation. In its various forms — external economies and diseconomies, divergencies between marginal social and marginal private cost or product, spillover and neighbourhood effects, collective or public goods — externality dominates theoretical welfare economics, and, in one sense, the theory of economic policy generally. Despite this importance and emphasis, rigorous definitions of the concept itself are not readily available in the literature. As Scitovosky has noted, "definitions of external economies are few and unsatisfactory".1 The following seems typical:External effects exist in consumption whenever the shape or position of a man's indifference curve depends on the consumption of other men.[External effects] are present whenever a firm's production function depends in some way on the amounts of the inputs or outputs of another firm2.It seems clear that operational and usable definitions are required…