Definition: Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

What meant by externality?

An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service.

What do you mean by externalities Class 12?

Externalities refer to the benefits or harms that a firm or an individual causes to another for which they are not paid. For example, river pollution created by an oil refinery has disastrous effects on aquatic life. It reduces the overall welfare of the society and create negative externality.