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Externalities (Economics)

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  • First Online:
Encyclopedia of Sustainable Management

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Synonyms

External economy; Market externalities; Spillovers; Technical externalities

Definition

An externality or external economy is a microeconomic term referring to a cost or benefit when the consumption or production decisions of goods and services cause an impact on third parties which are not reflected in the market price (OECD 2019). In economic activity, producer (supply side of the economy) and consumer (demand side of the economy) are the first and second parties, while third parties refer to other economic agents or units which are indirectly affected (Economics Online 2019). The concept of externalities explains the effect of market interactions on external agents. In a free market economy, producers and consumers play a key role in a market mechanism. Any market decision may lead to misallocation of resources and/or market failure. The consumption decision and production decision directly affect the externalities which are called spillovers.

Arthur C. Pigou is one of the...

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References

Further Reading

  • Blinder, A. (1987). Hard heads, soft hearts: Tough-minded economics for a just society. New York: Addison-Wesley.

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  • Coase, R. (1960). The problem of social cost. Journal of Law and Economics, 3(1), 1–44.

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  • Cowen, T. (1992). Public goods and market failures. New Brunswick: Transaction Publishers.

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  • Friedman, D. (1996). Hidden order: The economics of everyday life. New York: Harper Business.

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  • Schultze, C. (1997). The public use of private interest. Washington, DC: Brookings Institution Press.

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  • Viscusi, W. K. (1994). Cigarette taxation and the social consequences of smoking (NBER Working Paper No. 4891). Cambridge, MA: National Bureau of Economic Research.

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Author information

Authors and Affiliations

  1. Faculty of Business Administration, Department of Economics, Yasar University, Izmir, Turkey

    Serpil Kahraman

Authors
  1. Serpil Kahraman
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Corresponding author

Correspondence to Serpil Kahraman .

Editor information

Editors and Affiliations

  1. London Metropolitan University, Guildhall Faculty of Business and Law London Metropolitan University, London, UK

    Samuel Idowu

  2. Cologne Business School, Ingolstadt, Germany

    René Schmidpeter

  3. College of Business, Loyola University New Orleans, New Orleans, LA, USA

    Nicholas Capaldi

  4. International Training Centre of the IL, International Labor Organization, Turin, Italy

    Liangrong Zu

  5. Department of Economics, Society and Politics, University of Urbino Carlo Bo, Urbino, Italy

    Mara Del Baldo

  6. Instituto Politécnico da Guarda, Guarda, Portugal

    Rute Abreu

Section Editor information

  1. Yasar University, Izmir, Turkey

    Duygu Türker

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Kahraman, S. (2021). Externalities (Economics). In: Idowu, S., Schmidpeter, R., Capaldi, N., Zu, L., Del Baldo, M., Abreu, R. (eds) Encyclopedia of Sustainable Management. Springer, Cham. https://doi.org/10.1007/978-3-030-02006-4_558-1

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  • DOI: https://doi.org/10.1007/978-3-030-02006-4_558-1

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  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-030-02006-4

  • Online ISBN: 978-3-030-02006-4

  • eBook Packages: Springer Reference Business and ManagementReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences

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