What is an externality?
It is an ancillary effect of production or consumption for which no internal cost is incurred, typically when the actions of firms and individuals have an effect on others than themselves; e.g., pollution of a river that negatively affects the health of people living downstream rather than employees of the firm releasing the harmful material. An externality could also be a similar process having a positive effect; e.g. investment by a nation to reduce its CO2 emissions that provides a more stable climate for other nations.
