Traditionally, a society’s literacy has been measured by the ‘literacy rate’ or the per cent of the adult population that is literate. The present paper maintains that the. distribution of . literates across households also matters, due to the external effects of literacy - the benefits that illiterate members of a household derive from having a literate person in the family. The authors review this argument, draw out its policy implications, and present some suggestive data from Bangladesh to lend substance to the hypothesis that an illiterate belonging to a household with no literates is more deprived than an illiterate belonging to a household with at least one literate member.