An external cost is a negative externality representing a Cost arising from an Activity of one economic actor which is experienced by another economic actor without this cost being part of the price of the Good or Service supplied by the first actor.
External costs represent a fundamental concept in economics and sustainability assessment. They arise when the actions of one party impose costs on others who have not agreed to incur those costs and are not compensated through market transactions. This creates a disconnect between the private costs borne by producers or consumers and the full social costs of economic activities.
Common examples of external costs in Life Cycle Assessment include air pollution from manufacturing processes affecting public health, greenhouse gas emissions contributing to climate change, water contamination impacting ecosystems and communities, and noise pollution reducing quality of life for nearby residents. In each case, the producer of the good or service does not bear the full cost of the harm caused, and these costs are instead distributed across society.
The existence of external costs leads to market inefficiency because prices do not reflect the true cost of production and consumption. When external costs are significant and unaccounted for, this can result in overproduction of goods with negative environmental or social impacts, as the market price appears lower than the true social cost.
For optimal resource allocation and sustainable development, external costs should be internalised through mechanisms such as environmental taxes, emission trading schemes, regulatory standards, or extended producer responsibility programmes. This ensures that economic actors who generate external costs bear responsibility for them, creating incentives for cleaner production and more sustainable consumption patterns.
In Life Cycle Sustainability Assessment, quantifying external costs alongside internal costs provides a complete picture of the true economic burden of a product system, enabling more informed decision-making that accounts for both market and non-market impacts on human wellbeing.
