Externalities, also called external costs, spill-overs or social costs, are costs generated by the producer but paid for by someone else. A typical example is a water user that emits polluted water into a stream. The user downstream must then purify the water before it could be used. This purification in effect means that the downstream user is paying the production costs of the upstream user.

It is now required that the generator of external costs must internalise it. This means that the producer must ensure that the costs occasioned by any such activity are retained by the producer. This is done by structuring the production process in a way that prevents such external impacts. In this regard NEMA states in section 2 that the pollution and degradation of the environment should be avoided, that for this purpose all the social, economic and environmental impact of activities should be considered, assessed and evaluated and that the costs of remedying pollution and environmental degradation must be paid for by those responsible for harming the environment.