Spillover Costs

Definition

Spillover costs, also known as external costs, are the unintended negative consequences of a transaction or activity that affect third parties who are not involved in the original decision-making process.

Analogy

Imagine you and your friends decide to have a party at your house. However, the loud music and noise from the party disturb your neighbors who were not invited. The annoyance caused to your neighbors represents spillover costs.

Related terms

Negative Externality: Negative externality refers to the specific type of spillover cost where there is an unintended harm imposed on others due to a particular economic activity.

Pollution: Pollution is an example of spillover costs where harmful substances released into the environment by one entity negatively impact others' health or well-being.

Traffic Congestion: Traffic congestion can be seen as a form of spillover cost because it affects not only drivers but also pedestrians and other road users who experience delays and increased travel time.