cost or benefit of an action that is not borne by the person who chooses to take that action

An externality is a cost or benefit associated with an action that is not borne by the person who chooses to take that action. Costs are also called negative externalities and benefits are called positive externalities.

An example of a negative externality is air pollution caused by driving a car powered by fossil fuel, an example of a positive externality is a rainbarrel which not only holds water for the owner, but also reduces the amount of runoff water.

Both positive and negative externalities lead to less than optimal outcomes in economic terms. A negative externality for a common good may also cause a 'Tragedy of the commons'.

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