Pecuniary externality

A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

This is in contrast with technical or real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment. Pecuniary externalities should not be taken into account in cost-benefit analysis.

Both pecuniary and real externalities can be either positive or negative.

For a recent publications on pecuniary externalities see 'Price, C. (2007) Sustainable forest management, pecuniary externalities and invisible stakeholders. Forest Policy and Economics 9: 751-762.' An early reference that makes use of this terminology is 'Prest, A. R. and R. Turvey (1965) Cost-Benefit Analysis: A Survey. The Economic Journal 75: 683-735. The notion of a 'pecuniary spillover' is also introduced by 'McKean, Roland (1958) Efficiency in Government through Systems Analysis: With Emphasis on Water Resources Development (John Wiley: New York).' McKean notes that economists often make a distinction between technological and pecuniary effects, which may have been true at the time but is not the case today.