What does the term 'externalities' refer to?

The term 'externalities' refers to effects or consequences that arise from an action, decision, or occurrence that impact parties who did not choose to incur that cost or benefit. This concept is often used in economics to identify both positive and negative impacts of transactions that affect third parties outside of the involved parties.

In the context of managing ethical procurement and supply, recognizing externalities is critical, as businesses need to be aware of the broader social, environmental, and economic impacts of their activities. For instance, if a company’s manufacturing process leads to pollution in the surrounding community, that pollution is a negative externality that affects the residents despite them not being part of the transaction.

The understanding of externalities emphasizes the importance of ethical decision-making in procurement, as it encourages organizations to consider the wider impacts of their sourcing and supply chain decisions on society and the environment. Properly addressing externalities can help businesses minimize negative impacts and enhance their positive contributions, aligning with ethical procurement practices.