There is a strong temptation to avoid giving an explicit definition of externality, since even this first step has been a fertile source of controversy, and instead to approach the matter obliquely by putting to work various models in each of which an externality is obviously present. Whatever problems it raises, however, a brief definition will provide a useful focus for further clarification of our ideas, and we begin by considering the following definition, proposed by Meade (1973): “An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.”

Meade's definition has at least two notable features. First, it is not at all specific about the institutional framework within which social interactions take place. It simply suggests that whatever that framework is, it places constraints on the ability of individuals to take steps to encourage (discourage) actions of others that confer benefits (costs) on them. It is very much a policy-oriented definition, leading one naturally to consider alternative means of providing such encouragement or discouragement. Pigou's suggested remedy of using taxes and subsidies, which we shall explore in Chapter 4, is one such alternative.

Second, Meade's definition casts an extremely wide net, labeling as externalities situations that other writers prefer to call by some other name.