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Externality

Is a cost/benefit that is imposed on third parties i.e. economic agents who were not involved directly in the production/consumption of the good.

The presence of an externality in a market signals market failure and therefore society's welfare is not being maximised. 

There are four different forms of externalities that can arise in an economy:

  • Negative Production Externalities
  • Positive Production Externalities
  • Negative Consumption Externalities
  • Positive Consumption Externalities
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