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An externality, according to economic theory, is a negative or positive impact of a market transaction on people not involved in that transaction (i.e., neither the buyer nor the seller). An example of a positive externality is the construction of a beautiful building that adds to the attractiveness of a city. Environmental issues usually involve negative externalities, however, including air and water pollution, waste disposal, degradation of ecosystems, depletion of natural resources, and adverse impacts on human health. The main impact of externalities may occur at the time of the transaction, or later, such as acid mine drainage from abandoned coal mines.

Many economists regard externalities as an exception in economic activity. However, environmentalists disagree, because virtually every economic transaction involves the manipulation of natural resources, ...

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