- cost or benefit imposed on third parties who are not direct participants in a transaction
- negative externality: harm to others (pollution, congestion, noise), leads to overproduction by the market
- positive externality: benefit to others (education, vaccination, open-source software), leads to underproduction
- market failure: prices fail to reflect full social costs or benefits when externalities exist
- Pigouvian tax: tax equal to marginal external cost, internalizing the negative externality (Arthur Pigou)
- Coase theorem: with zero transaction costs and clear property rights, parties negotiate efficient outcomes regardless of initial allocation (Ronald Coase)
- in cybernomics: every cyberlink generates positive externalities by enriching the shared knowledge graph for all participants
- carbon credits, cap-and-trade systems, and staking slashing are mechanisms to price externalities