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What is an externality? Can you give an example of a positive externality and another of a negative externality? In what way does the patent system help society solve an externality problem?

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According to Econterms, externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account. In other words, externalities are the side-effects created when a market outcome affects other parties than the buyers and sellers in the market. They cause markets to become inefficient and ineffective thereby failing to maximize the total surplus. Another way to define externality is when a person engages in an activity that influences the well-being of others and yet not one of them pays or receives any compensation for that effect, an externality arises. Another way is to describe these externalities as third party spill-over effects which arises from production and/or consumption of goods and services for which no appropriate compensation is paid (Tutor2u). In short, externality is a term in ...

Solution Summary

The solution defines externality, gives examples of positive and negative externalities and it also discusses how the patent system helps society solve an externality problem. References included.