Externality

Externality - Externality Markets are sensitive only to...

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Externality Markets are sensitive only to benefits or costs that can be translated into willingness to pay on the part of buyers, or into costs incurred by sellers. An economic choice or action by one economic actor that affects the welfare of others who are not involved in that choice or action is called an externality . In defining externalities we focus on effects that impinge on third parties through non-market channels. More specifically: A negative externality (sometimes referred to as an “external cost”) exists when an economic actor produces an economic cost but does not fully pay that cost. A well-known example is the manufacturing firm that dumps pollutants in a river, decreasing water quality downstream. A positive externality (sometimes referred to as an “external benefit”) exists when an economic actor produces an economic benefit but does not reap the full reward from that benefit. Positive externalities are less well-known, but can be vitally important to individual and societal well- being. A landowner, for example, by choosing not to develop her land might preserve a water recharge source for an aquifer shared by the entire local community. Other examples are parents who, out of love for their children, raise them to become decent people (rather than violent
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Externality - Externality Markets are sensitive only to...

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