externality - Externalities Chapter20 Externalities...

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2009-12-31 1 Chapter 20 Externalities Externalities An externality is a cost or a benefit imposed upon someone by actions taken by others. The cost or benefit is thus generated externally to that somebody. ll d b f An externally imposed benefit is a positive externality . An externally imposed cost is a negative externality . Examples of Negative Externalities Air pollution. Water pollution. Loud parties next door. Traffic congestion. Second hand cigarette smoke. Increased insurance premiums due to alcohol or tobacco consumption. Examples of Positive Externalities A well maintained property next door that raises the market value of your property. A pleasant cologne or scent worn by the person seated next to you. Improved driving habits that reduce accident risks. A scientific advance. Externalities and Efficiency Crucially, an externality impacts a third party ; i.e. somebody who is not a participant in the activity that produces the external cost or benefit benefit. Externalities and Efficiency Externalities cause Pareto inefficiency; typically too much scarce resource is allocated to an activity which causes a negative externality too little resource is allocated to an activity which causes a positive externality.
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