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Financial Accounting Theory (5th Edition)

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Matt Steger Accounting 803 Seminar 24 - Standard Setting: Economic Issues (Cont.) In the second part of Chapter 12, Scott presents the definitions of externality and free- riding, followed by a discussion about how adverse selection arises as the result of all inside information not being released into the market. He also discusses the implications of a lack of unanimity within an economic setting, how much information is enough, decentralized regulation as it relates to information, and a chapter conclusion. Scott begins by presenting the following definitions for externality and free-riding: “An externality is an action taken by a firm or individual that imposes costs or benefits on other firms or individuals for which the entity creating the externality is not charged or does not receive revenue. Free-riding is the receipt by a firm or individual of a benefit form an externality” (Scott, 462). He then tells us that externalities and free-riding are motivating factors in regulation and that,
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