<p>You don't give the source of the quote, but presumably what is meant is this.  Whether X's production or consumption of a good affects Y (in a physical way such as smoke from X's factory or noise from X's playing loud music, not merely through the workings of the price system) is a matter of fact.  On the other hand, whether X is required (assuming a negative effect) to bear the costs of the harm to Y, is a matter of law.  The implication seems to be that an externality is present only if the law does not so require.</p>

<p>However, some writers would exclude the legal aspect from the definition of an externality.  Baumol &amp; Oates, for example, state (quote found <a href="http://ron-griffin.tamu.edu/x636/handouts/HO3.pdf" rel="nofollow noreferrer">here</a>, top of page 5):</p>

<blockquote>
  <p>"An externality is present whenever some individual's (say A's) utility or production relationships include real (that is, nonmonetary) variables, whose values are chosen by others (persons, corporations, governments) without particular attention to the effect's on A's welfare."</p>
</blockquote>

<p>An advantage of this type of definition is that it avoids the implication that an externality is no longer present when it has been addressed by law as above. Instead, we can say that the externality is still present but has been internalized.</p>

CC BY-SA 3.0
2016-11-16T03:22:14.180Z
According to the quoted definition from Baumol & Oates, when "particular attention" has been paid to A's welfare, say by adequate compensation or some Pigouvian tax, the externality no longer exists even when harmful effects are still present.
Paul
CC BY-SA 3.0
2016-11-04T10:35:07.243Z
2016-11-04T10:35:07.243Z
Adam Bailey
<blockquote>
  <p>that something is an externality is partly a statement about physical reality and partly a statement about the legal system.</p>
</blockquote>

<p>What does this mean? I assume the aspect of externality being a physical reality problem is just people only care about self interest so externalities can occur. However I don't understand how something is An externality could be a statement about legal rule.</p>



<externalities><law><definition>
Understanding at a quote about externalities in law and economics
Qwertford
# Understanding at a quote about externalities in law and economics

(Asked by: username_0 on 2016-11-04)

> that something is an externality is partly a statement about physical reality and partly a statement about the legal system.

What does this mean? I assume the aspect of externality being a physical reality problem is just people only care about self interest so externalities can occur. However I don't understand how something is An externality could be a statement about legal rule.

**Tags:** externalities, law, definition

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## 1 answers

### Answer by username_1 on 2016-11-04. Score: 3 | Accepted answer

You don't give the source of the quote, but presumably what is meant is this. Whether X's production or consumption of a good affects Y (in a physical way such as smoke from X's factory or noise from X's playing loud music, not merely through the workings of the price system) is a matter of fact. On the other hand, whether X is required (assuming a negative effect) to bear the costs of the harm to Y, is a matter of law. The implication seems to be that an externality is present only if the law does not so require.

However, some writers would exclude the legal aspect from the definition of an externality. Baumol & Oates, for example, state (quote found [here](http://ron-griffin.tamu.edu/x636/handouts/HO3.pdf), top of page 5):

> "An externality is present whenever some individual's (say A's) utility or production relationships include real (that is, nonmonetary) variables, whose values are chosen by others (persons, corporations, governments) without particular attention to the effect's on A's welfare."

An advantage of this type of definition is that it avoids the implication that an externality is no longer present when it has been addressed by law as above. Instead, we can say that the externality is still present but has been internalized.

> **Comments:**
> **username_2**: According to the quoted definition from Baumol & Oates, when "particular attention" has been paid to A's welfare, say by adequate compensation or some Pigouvian tax, the externality no longer exists even when harmful effects are still present.  

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