What is an external cost, in economic terms?

Question

What is an external cost, in economic terms?
And what is an external benefit?

Answer 1

Externalities are unintended consequences (sometimes described as "spillover") resulting from economic transaction.

There are two types of externalities:

1) External Costs: a negative, unintended effect

Ex: automobiles are intended to help people travel more efficiently, but exhaust emitted from automobile results in a tremendous "external cost" to the government, and thus society through taxation (an undesired effect)

2) External Benefit: a positive, unintended effect

Ex:An increase in production of XYZ automobiles were intended to satisfy increased demand. As a result, the demand for mechanics specializing in XYZ cars increase, thereby fueling more jobs (a desirable effect).

Hope that explains.

Answer 2

External costs - things that are expenses of producing/selling a product but the supplier doesn't pay for. So the sale of the product tends to not include external costs, but society as a whole still brunts the costs. Example: pollution; bad health from cigarettes, negative associations with alcohol

External Benefit - things that pay in the production/selling a product, but the supplier doesn't collect it. Society as a whole still benefits. Example: Health care - Your doctor doesn't get paid for all the sick days he helps cut down on to the overall economy, mass transit may cut down on pollution.

Externalities is a problem in economic forecasts and throws off equilibrium price as the Utopian Market Economy Theory assumes all costs and benefits are accounted for.