Externality  

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Train wreck at Montparnasse (October 22, 1895) by Studio Lévy and Sons.
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Train wreck at Montparnasse (October 22, 1895) by Studio Lévy and Sons.

In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. When there is no externality, allocative efficiency is achieved; however, this rarely happens in the free market. Economists often urge governments to adopt policies that will "internalize" an externality, so that costs and benefits will affect mainly parties who choose to incur them.

For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of individuals who choose to fire-proof their homes may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, an element of externalization is involved. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the imputed monetary value of benefits and costs to all parties involved.

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Unless indicated otherwise, the text in this article is either based on Wikipedia article "Externality" or another language Wikipedia page thereof used under the terms of the GNU Free Documentation License; or on original research by Jahsonic and friends. See Art and Popular Culture's copyright notice.

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