Also known as: externalities · external · spillover · third-party effect
Written by attorneys · grounded in primary & secondary sources — see below
A social or monetary consequence or side effect of one's economic activity that causes another to benefit without paying or to suffer without compensation.
Equinox Energy operates a plant whose smokestack emissions drift onto Elijah Edwards's adjacent farmland and reduce crop yields. The resulting crop losses impose uncompensated costs on Edwards while Equinox Energy captures the full profit from its production. Edwards sues seeking damages for the side effect of the plant's operations.
Eugene Ellsworth and Elena Estrada own undivided interests in rural land that zoning rules render unusable if divided into separate parcels. A court orders sale of the whole tract and division of proceeds because physical division would create parcels with no independent value. The zoning constraint functions as an external factor that affects the economic value each co-tenant receives.
Eduardo Enriquez's will leaves his art collection to whichever of his children is living in the family home on his eightieth birthday. The identity of the recipient therefore depends on an external circumstance that has independent significance apart from the will itself. The devise remains valid because the external fact supplies meaning without being created solely to affect the estate plan.
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The federal government seizes steel mills during a labor dispute, halting output at plants owned by Youngstown Sheet & Tube. Downstream manufacturers that rely on the mills' steel face sudden shortages and higher costs that the seizure itself did not intend to create. Those uncompensated losses constitute side effects of the government's action on third-party economic activity.
Edgewater Capital ships arms components abroad under a license later restricted by presidential proclamation. Foreign buyers cancel contracts and domestic suppliers lose expected revenue because the proclamation alters market access. The resulting losses fall on parties who had no role in the foreign-policy decision that produced them.
Everest Holdings seeks a development permit from the St. John's River Water Management District. The district demands off-site mitigation payments that exceed the direct impact of the project. The required payments transfer costs to the developer that arise from broader environmental side effects felt by the surrounding community.
A negative externality imposes uncompensated harm on third parties, such as pollution from a factory. A positive externality confers uncompensated benefits, such as improved neighborhood aesthetics from landscaping. Both are side effects of economic activity that the market price does not capture.
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Legal rules such as nuisance actions, regulatory standards, or permit conditions can force the actor to internalize the external costs. These mechanisms shift the burden back onto the party whose activity generates the side effect.
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Yes. Government decisions such as seizures, export controls, or permit conditions can produce side effects that alter costs or benefits for parties not directly involved in the decision.
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…368 U. S. 25, 28 (DOUGLAS, J., dissenting). There is no serious contention that Connecticut thinks the use of artificial or external methods of contraception immoral or unwise in itself, or that the anti-use statute is founded upon any policy of promoting population expansion. Rather, the statute is said to serve the…