Externality

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  • A spillover cost or benefit to a society, and sometimes to the rest of the world. Externality may be linked to the overallocation and underallocation of resources. A spillover cost or benefit affects a third or external (nonmarket) party. Private costs are borne by producers and consumers of a good because producers incur costs in the process of producing a good, which can be transferred to consumers who will derive satisfaction from the consumption of such a good.

    The social cost is the combination of the private cost and external or environmental cost. This identity makes it feasible to see that the external cost is the social-private cost differential. External benefits can analogously be understood as the social-private benefit differential.

    The market supply curve of a ...

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