Define Externality

Ya, $10 word, deal with it

Externality is a $10 word. The term was coined in the early 20th Century and exhibits all the utilitarian formality one would expect from Cambridge economists.

But, like most technical terms, it’s a symbol for a powerful concept:

A cost or benefit that affects a party who did not choose to incur that cost or benefit.

Religious extremism leading to civilian deaths, pollution in China spreading abroad, Uber decimating the labor market for yellow cabs, and vaccinations preventing public epidemic are all externalities.

These side effects of economic/political/institutional interaction are often hard to calculate. To incorporate these consequences back into prices or policies is even harder. End result? Markets and institutions with imperfect information fail to adapt their behavior.

It’s something I’m passionate about. Hopefully, you’ll find something interesting in my blog and things to come in the future.