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Externalities: A summary

A summary of the categories of externalities (positive and negative, production and consumption) and how the affect the efficiency of markets.

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A positive externality is a benefit from a good or service that is enjoyed by an economic agent outside the market for that good or service. When a consumer buys a product, and that product produces benefits for the consumers neighbors, the neighbors enjoy a positive externality. When someone plants flowers in their yard, their neighbors get the benefit of seeing flowers in that yard, even though they didn't buy the flowers.

A negative externality is a cost from a good or service that is suffered by agents outside the marekt for that good. So when someone plays loud music that disturbs their neighbors, the neighbors suffer a negative externality. They didn't 'buy' the music, but they are paying a cost because of it.

The two examples I ...

Solution Summary

A summary of the categories of externalities (positive and negative, production and consumption) and how the affect the efficiency of markets.

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