In economics, an externality is an effect from one activity which has consequences for another activity but is not reflected in market prices. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is generated from a market transaction.

An externality occurs when a decision causes costs or benefits to stakeholders other than the person making the decision, often, though not necessarily, from the use of common goods (for example, a decision which results in pollution of the atmosphere would involve an externality). In other words, the decision-maker does not bear all of the costs or reap all of the gains from his or her action. As a result, in a competitive market too much or too little of the good may be consumed from the point of view of society, depending on incentives at the margin and strategic behavior. If the world around the person making the decision benefits more than she or he does, such as in areas of education, or safety, then the good will be underprovided; if the costs to the world exceed the costs to the individual making the choice in areas such as pollution or crime then the good will be overprovided from society's point of view.