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Revision:ExternalitiesTSR Wiki > Study Help > Subjects and Revision > Revision Notes > Economics > Externalities Externalities are effects of production or consumption of a good on a third party, who is not directly involved in the activity. Externalities can be internalised by bringing the cost home to the producer or consumer so that they have to pay for clean-up. Externalities cause market failure if the cost/benefit to third parties is not taken into account. The wrong quantity of goods is produced, leading to a loss of welfare.
Negative ExternalitiesThe quantity Q1 to Q2 is overproduction. Negative externalities occur when the production or consumption of a good causes costs to a third party. Examples include:
Positive ExternalitiesThe quantity Q1 to Q2 is underproduction. Positive externalities provide benefits to people not directly concerned with the production or consumption of the good. Examples of positive externalities include public transport, vaccinations and education. Internalising the externality
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