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externality and recent policies

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What is an externality? Give 3 examples and recent policies to resolve them.

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Solution Summary

An externality is clearly defined.

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An externality is a spill over from an economic activity. It is often referred to as a by-product of the market mechanism (supply equals demand). Negative externalities are often viewed as examples of market failure, in other words, the market mechanism creates a level of consumption / production that is higher than society desires.

Thus Externalities' is the economic term for the costs (e.g. environmental and social) of an economic activity which are not borne by the operator, but instead by the wider community. For example, if a forestry operation contributes to species loss or habitat destruction and these 'costs' are not somehow paid by the operator and thus reflected in the price of ...

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