A more precise Definition

Definition of external costs of an activity:
the costs of damages generated by an activity that fall back on other individuals or social groups, and that are not paid in advance by the responsible of that activity with the aim of preventing, mitigating or compensating that damages.

With other words, external costs are demonstrated expected damages (for example the sum of health, environmental and private property damages) that are not paid and consequently not taken into account in the decision making process of a certain activity. The “cost structure” of the activity doesn’t transmit effectually the economic information that influence the decision making, thus preventing the way to reach the social optimum.

© 2006 - Andrea Molocchi