system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: what are externalities and why are they so important in everyday life?
gpt
It's a catch all term for any variable that are not included in a given system. They are external to it.

Classic exemple, the "cost" to society of producing CO2 was never taken into account. It was free, "external" to the decision making process, so no one had any incentive to even monitor it, even less try to reduce it.

Compare to the cost of energy, that is "part" of the economic equation: all economic actors will try to optimize it or reduce it.

If you want an efficient market that take into account CO2, you need to make this externality, "internal" which is the goal of things like CO2 allocations and CO2 markets. That's not that easy.