Externalities are unintended side effects of economic activities that impact third parties who are not directly involved in the market transaction. They can have positive or negative effects that can influence society and the environment in various ways.
Positive Externalities
Positive externalities occur when a market activity produces benefits for others without those beneficiaries having to pay for it. Examples include:
Negative Externalities
Negative externalities happen when an activity imposes costs on others who are not compensated for their lost benefits or their costs of recuperation. Examples include:
From Chapter 16:
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