The concept of "externality" is the basis of the development of the "Economy of the environment".
An externality exists when advantages or drawbacks of a transaction between two economic agents are generated towards other economic agents without any payment or compensation therefore. A negative externality (negative monetary amount) corresponds to the depreciation of the natural stock, the well-being, the utility or satisfaction of external (to the transaction) economic agents without any financial compensation.
According to Pigou (1920), advantages and drawbacks related to externalities can be monetarised. The externalities can represent then the imbalance between the "social cost" and the "private costs" (costs borne by the two economic agents involved in the transaction) : social cost = private costs + externalities.
(based on "Economie de l'environnement", Encyclopaedia Universalis, 2007)
In the environmental policy, this notion refers mainly to negative externalities such as pollution and damages to the environment and human health that are not taken into account in the market price of human activities. The existence of negative environmental externalities is the major "economic" justification for the intervention of the public sector to compensate for these market failures and is the basis for the adoption of the "polluter pays principle" (internalization of the environmental externalities).
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