Define external costs.
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Define external costs
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Answer:
In economics, an external cost is a cost that is incurred by an individual, firm, or community as a result of an economic transaction that they are not directly involved in. External costs are also known as:
Spillovers
Third party costs
Externalities
External costs can arise from both production and consumption. They are often the result of market failures, such as when a company pollutes the environment without paying for the cleanup costs.
Examples of external costs include:
Pollution
Air pollution from burning fuel
External costs are not included in the market price of the goods and services being produced. Goods and services with external costs are effectively being subsidized by society-at-large which ends up paying them.
If there are external costs in consuming a good, the social costs will be greater than the private cost. The existence of external costs can lead to market failure.
Explanation:
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