what are externalities and why are they so important in everyday life?
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Impact on people outside the decision-making process. Can be positive or negative.
Classic example #1: If I choose to not mow my lawn, any neighbor trying to sell their house will have a difficult time, or have to sell at a lower price. In a system that catches all the impacts, they might pay me to keep my lawn mowed. But that is not how we do it. I choose to mow or not mow primarily on how it affects me.
Classic example #2: If a business can dump their waste products in a nearby stream without consequence, they have lower costs than if they had to dispose of it properly. They can make more widgets, sell at a lower price, and/or realize higher profits. But their free polluting affects all the people downstream that rely on or enjoy that waterway. We use regulations and fines to take those costs that were “external” to the companies cost/benefit calculation and move them “internal” to get decisions that are more socially efficient.
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