Existential Externality Theory - Final Version

Abstract This paper introduces the concept of existential externalities, defined as impacts threatening the fundamental capacity of individuals and ecosystems to sustain essential life functions independently of market dynamics. Unlike conventional externalities, existential externalities induce sharp discontinuities in utility functions at critical survival thresholds, due to lexicographic preferences. We formally demonstrate that as essential goods approach these minimal survival thresholds, their economic valuation tends towards infinity. This outcome fundamentally challenges traditional marginalist approaches and underlying assumptions of neoclassical economic theory. Consequently, conventional market mechanisms become ineffective and ethically inadequate for allocating existential goods. Our analysis advocates for a dual framework integrating subjective preferences with objective survival constraints, and suggests innovative policy instruments specifically tailored to effectively internalize existential externalities despite the “infinite” potential costs.