IntroductionExternality arises when a person or firm engages in an activity (production or consumption) that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect.For example pollution is an externality because For example, pollution is an externality because the polluter does not pay for the damages it causes to the environment.2
Types of ExternalityExternality can be Negative or Positivedepending h thth tif tiupon whether the action of one party imposes a cost or benefit on another party.Negative Externalities: ExamplesNoise, vehicle exhaust, acid rain, ozone depletion caused by chlorofluorocarbons (CFCs), l b l idh(bglobal warming due to greenhouse gases (carbon particles from fossil fuel combustion, etc.).PitiE tlitElPositive Externality: Examplesresearch and innovation, neighbor’s nice backyard, Immunization.3
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