EXTERNAL COSTS Meaning and
Definition
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External costs refer to the negative consequences or impacts that are not borne by the person or entity responsible for causing them but are instead paid by society as a whole or by third parties. These costs are also known as externalities.
In economics, external costs can arise when the production or consumption of a good or service imposes costs on individuals or the environment that are not accounted for in the market price. These costs can include pollution, environmental damage, health problems, and other social or economic harms that are not reflected in the price paid by the buyer or received by the seller. For example, a factory polluting a nearby river with its waste imposes external costs on the local community who suffer from the contaminated water supply.
External costs can be seen as market failures because they lead to inefficient resource allocation and suboptimal outcomes. They can also give rise to social injustices as those who generate the costs do not bear the full responsibility, while others have to pay the consequences.
It is important to quantify and internalize external costs in order to create a more accurate pricing mechanism that reflects the true social and environmental impacts of economic activities. This can be achieved through regulatory measures, such as taxes or permits, that aim to internalize the externalities and encourage individuals and businesses to take into account the full costs of their decisions.
Etymology of EXTERNAL COSTS
The word "external costs" is derived from the combination of the adjective "external" and the noun "costs".
The term "external" comes from the Latin word "externus", which means "outside" or "pertaining to the outside". In this context, it refers to something outside of a particular system or framework.
The word "costs" is derived from the Old French "coste", which means "rib", and later evolved to mean "side" or "expenses". It refers to the expenditure or sacrifices required to achieve or acquire something.
When combined, "external costs" refers to expenses or negative consequences that are not directly borne by the entity or individual responsible for them. These costs are instead imposed on society, the environment, or other parties not involved in the transaction or activity generating the costs. This term is commonly used in economics and environmental studies to describe the indirect impacts or damages associated with certain actions.
