What are Externalized Costs

What are Externalized Costs? Here's the Explanation With Examples

An important factor of consideration in modern economics is externalized cost. Here's a brief explanation.
Economics is a subject devoted to the study of how market processes function to create wealth and value. It studies all the macroscopic effects of economic transactions in terms of costs and benefits. Externalized costs arise from the fact that nothing is isolated in the world and every single thing that happens, affects a multitude of other things happening simultaneously.

The Concept

Economics is not just about studying the flow of money and resources. It studies the economy as a whole and an important part of it is studying the large-scale effects of every single transaction, on the market as a whole. That is where the concept of externality comes in.

Externalized costs generated by any economic activity are the expenses which are paid for, by entities who are not directly involved in the execution of the activity. They are essentially negative effects of any transaction, which do not affect the ones who participated in it, but are borne by third parties.

Externalized benefits are positive effects that occurs as a result of any economic activity, which may not be received by the people who are responsible for the activity. It is an unforeseen positive effect of an action, which benefits external agents, who are not part of it. In fact, every kind of business activity or human action has costs and benefits, that are not envisaged by the ones who execute it. Economics is dedicated to the study of such aftereffects or ripples that are created by every action in an economy or a market.

It aims at suggesting ways in which external costs may be reduced and more benefits may be propagated to the whole market and environment as a whole. If you look around, there are innumerable examples of such costs and benefits which arise, as a result of the introduction of any technology.


One of the prime examples of externalized costs is the air pollution caused by manufacturing and running of automobiles. As a consequence of air pollution, people suffer from many diseases like respiratory problems, skin problems, and heart disorders. The cost of producing cars is borne by these people who pay the price for it in terms of hospitalization and a reduction in their lifespans.

Another example is building of dams on rivers, which leads to the destruction of an entire ecosystem when the land around rivers is taken over by dam reservoirs. Every one of our attempts at modifying our external environment comes with many costs which directly impact our ecosystem.

To sum it all up, costs and benefits are spin-offs and unpredicted aftereffects of any economic activity, which are accrued by entities that are not a part of the original transaction. One of the serious costs which the whole world is paying for, is environmental pollution, in all its forms. To lessen their impact, people engaging in manufacturing of products, leading to air and water pollution, need to realize that actions have far reaching consequences. The price of these costs is going to be paid by future generations. There is the need to think about things in a more wholesome way and think beyond immediate profit and loss.