An externality is a type of market failure in which a cost or benefit occurs to an uninvolved party, or recipient, from another party's (or parties') activity. Either "party" can be an individual person or any group of people (ranging all the way from a single family to a city or region or country), and the recipient can also be some aspect of the natural or man-made environment. The cost or benefit is very often in a non-monetary form, although such non-monetary cost or benefit can have monetary consequences.
Externalities are often classified as being either negative or positive. The former are those that harm the receiving party, and the latter are those that benefit the receiving party. A negative externality can be described as resulting from an activity in which the producer of the activity does not bear the full the full social cost of the activity, but rather shifts it on to someone or something else (e.g., the environment). This is essentially lowering the cost of production for the producer and allowing them to produce more than they would be willing or able to if they had to bear the full costs.
Sometimes an externality can be either negative or positive according to its recipient. For example, one person might find hearing a neighbor's daily piano practicing to be annoying, while another person might find it delightful. Or, the heating of water in a pond from an adjacent factory or power plant might harm some species that live there but help others there to thrive.
Some externalities are readily apparent to humans, such as smog and noise pollution. Others are less obvious, and might not be detectable without highly specialized equipment, such as the release of ozone layer-destroying chlorofluorocarbons, of toxictoxic heavy metals into the soil, and of radiation from a nuclear power facility.
Several means have been used in attempt to reduce or eliminate negative externalities. They include legal restrictions on their emission, the development of alternative processes and materials, land use zoning, and fees (including the "polluter pay" principle).
The current environmental crisis is mostly the result of externalities: that is, the result of activities by individuals, businesses, governments and others whose often invisible or hidden social costs have been shifted to the environment rather than borne by those who create them. This ability to shift much of the costs of production, use and disposal of goods and services to the environment has resulted in a much larger output of such activities than would otherwise occur. However, it has become increasingly difficult to hide such costs and shift them to the environment because the damage is becoming ever larger and more apparent and because public awareness of the damage and its consequences continues to increase.