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An externality is any side effect generated as a result of the consumption or production choices of one individual or entity and involuntarily received by another individual or entity. The decision maker’s analysis or calculation, either deliberately or inadvertently, ignores the consequence. The decision maker avoids “internalizing” a particular consequence and thus externalizes any cost or benefit. The recipient bears the burden of a negative (i.e., costly) externality and gains the value of a positive (i.e., beneficial) externality.

A negative externality imposes a burden elsewhere while benefiting the source through avoidance (i.e., externalization) of a cost. A classic example is water or air pollution. The polluter damages someone else and thereby avoids the cost of pollution control. Negative externalities particularly raise important issues for business ethics ...

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