This podcast introduces the economists’ useful notion of ‘externalities’ or spill-over effects. In the unsustainable economy, companies impose costs on society and nature without paying for these damages – these are negative externalities. For example, we look at what happens if we decrease the stock of biodiversity, either by a wetland being drained for development, tropical forests being cleared for agriculture, or a valley being flooded for a hydro-electric power scheme. On the other hand, lone sustainable companies may make contributions to the community or the ecology, without being financially rewarded for these benefits – these are positive externalities. The sustainability trend is forcing companies to internalise their social and environmental externalities, i.e. account for them in their own books. Climate change provides excellent examples of the application of economic instruments to promote sustainable commercial activity.