The preceding chapters analyzed the market's secondary effects and their attendant moral obligations. An externality – technological or pecuniary – is an unintended consequence inflicted on a third party. Technological externalities arise because economic actors neither fully bear the cost nor fully reap the benefits of their decisions. The classic example, of course, is that of a factory discharging effluents into its surroundings without having to pay for restoring a damaged ecology or without the economic incentive to employ cleaner, but more expensive, technologies. There is a disparity between the factory's private cost and the social cost. The general public ultimately pays for this differential (for example, by having to suffer ill health or inconvenience on account of a dirtier environment). In such a situation, unfettered market operations alone will not lead to the much-sought allocative efficiency, and extra-market mechanisms (such as pollution taxes) have to be employed to effect the optimum overall welfare possible. Thus, in mainstream (neoclassical) economics, technological externalities are viewed as market failures deserving of remedial action.

On the other hand, pecuniary externalities are unintended consequences that are entirely mediated through the price mechanism of the market. For example, California farmers find themselves having to pay more for their irrigation because the relentless growth of cities has bid up the price for increasingly scarce fresh water supplies. Unlike the preceding case of technological externalities, these unintended consequences of urban development are accepted as a normal part of the workings of a market.