The additional cost imposed on third parties by producing an extra unit of a good or service. The cost may be negative or positive.
Below is a diagram to highlight the external cost that is present in a market with a negative production externality. This measures the size of the external cost that will be realised from third-parties if the amount of goods produced falls to the socially optimal amount In this instance the marginal external cost exists because there is a divergence between the marginal private cost and the marginal social cost curves. The reason this good is overproduced is because the individual producers do not realise this external cost they are releasing onto society.
