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: