Finschool By 5paisa

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An externality is a cost or benefit a producer generates but does not personally bear or receive. An externality can result from the creation or consumption of a good or service and can be both positive and negative. Both private (to an individual or an organization) and societal (affecting society as a whole) costs and benefits are possible.

Natural environmental externalities, such those related to public health or natural resources, are the norm. A firm that generates pollution that lowers the property values or health of locals is an example of a negative externality.

When a good or service is produced or consumed in an economy, externalities happen when those actions have an effect on a party that is not directly involved in those activities.

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