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date: 27 February 2024


A Dictionary of Business and Management

Jonathan Law

A cost or benefit to an economic agent that is not matched by a compensating financial flow. For example, siting a railway station close to a housing estate represents an externality to householders on that estate. It is an external economy if the householders benefit from shorter journey times to work (and consequent rising house prices) and an external diseconomy if the noise of trains keeps them awake at night. In business, externalities can be defined as those economic effects of an entity that are not recorded in its accounts as they do not arise from individual transactions. For example, local overcrowding may arise because a large number of employees have been attracted to the neighbourhood, thus incurring extra costs for roads, schools, health care, etc. It is usually argued that governments should take steps to internalize external diseconomies, such as pollution, by means of taxation or other penalties. ... ...

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