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Pollution Externalities, Socially Efficient Regulation of

In economics, an externality is a benefit or cost that accrues to some entity that is a third party to the market transaction. Because under an externality the market price of the good will reflect the benefits and costs of the buyers and sellers of the good but will not incorporate the costs or benefits affecting the bystanders affected by the production or consumption of the good, the market will generally fail to provide these goods in socially optimal quantities. Viewed in this manner, an externality is the difference between the public and private costs (or benefits, depending on the nature of the externality) of a market activity. In the case of positive externalities, output will be below the socially optimal level, while negative externalities ...

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