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What are Externalized Costs?

Mary McMahon
Updated May 16, 2024
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Externalized costs are negative impacts associated with economic transactions which concern people outside of those transactions, meaning that neither the buyer nor the seller bears the brunt of the costs. One well-known example of this type of cost is factory pollution, which can have a negative influence on the surrounding community. Many activists have raised concerns about such costs, suggesting that some economic systems may need to be reformed in order to address them, and some consumers have joined in the chorus asking for reform of the way people and companies do business.

Anything which has an impact on someone outside of a transaction is known as an externality. Externalities can be good or bad, and they are incredibly varied. As a general rule, people use the term “externalized costs” to describe externalities which are negative, while “externalized benefits” are externalities which are good. Often, externalities are negative and positive simultaneously, which can create quite a tangled web of issues.

Examples of externalized costs beyond pollution include: resource depletion, climate change, and health problems, among many other things. Some externalized costs are a bit difficult to control; resource depletion, for example, can be challenging to combat when a company sees a demand for a product and wants to meet it, and pollution is an unfortunate side-effect of most industrialized production, even in relatively “clean” factories. Others may be deliberate on the part of the parent company, as is the case with companies which do not provide benefits to their employees, relying on society at large to support their employees.

The environment is often a victim of externalized costs. In the case of externalized costs like health problems caused through pollution or use of various products, individuals or groups can choose to pursue justice from the company which sold the product, or people who bought it, and most legal systems provide avenues of redress in these situations. However, the environment is a silent entity, making it challenging to bring suit on behalf of the environment.

Many countries have agencies in place to protect the environment, and many of these agencies work to reduce the impact of externalized costs on the environment, in the interests of protecting living individuals and future residents of the Earth.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By anon131592 — On Dec 02, 2010

This is not B.S. The thought of externalized cost can only be seen if you look outside of a consumer mindset. This is the bigger picture. This term is not to make people feel dumb. Externalizing costs means that goods are actually cheaper to the consumer. The environmental health of people, slave labor are some example of the cost of cheap goods.

By anon18229 — On Sep 17, 2008

This is just another B.S. term that accountants make up so they seem smarter than us or make us feel dumb. What it really means is companies can charge us more for their stuff and keep it as profit so then the government can clean up their mess and we get to pay for it again!

By anon18222 — On Sep 17, 2008

Very interesting, good article.

By anon18211 — On Sep 17, 2008

I have read that Germany made a charge on the amount of pollution put into the Saar River. This led to the companies cutting down or stopping polluting the river. From being the most polluted river in Europe, it became the least polluted.

D. W. Bales

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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