a cost (typically) or benefit of a business decision that does not enter into the financial accounting of the firm, organization, industry, or government but which is borne by others or society at large, e.g., water pollution by a firm creates an externality for the municipality downstream that must remove the pollutants during potable water treatment —note 1. externalities alter the optimal output level because they are not included in either the marginal cost or long-run average cost curves of the unit creating them —note 2. internalizing the externality, i.e., forcing the unit creating the externality to bear the true costs, has been a priority of public policy on pollution and is based on nuisance aspects of common law related to private property ownershipThis definition last updated 07/31/2008