Externalities are the impacts of people’s behaviour that are borne by others or the community generally. Externalities are made up of external costs and external benefits. They can be distinguished from internal costs and benefits which are borne directly by the user.
EXAMPLE
When people use their cars they incur the internal costs of fuel and wear and tear of their motor vehicles. They also generate congestion and boise that can adversely affect other people in the community. These are external costs.