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External Cost

External costs are costs that are not borne by the person or entity that causes them. They are often the result of market failures, such as when a company pollutes the environment without paying for the cleanup costs.

One real-world example of an external cost is pollution. When a factory emits pollution into the air, it creates a cost for society as a whole. This cost is in the form of health problems, such as asthma and respiratory infections, as well as damage to the environment. The factory does not pay for these costs, so they are external costs.

Another example of an external cost is traffic congestion. When people drive their cars, they create congestion on the roads. This congestion creates a cost for society as a whole in the form of lost time and productivity. The drivers do not pay for these costs, so they are external costs.

External costs can be a problem because they can lead to market inefficiencies. When companies or individuals do not pay for the costs that they create, they are not making decisions that are in the best interests of society as a whole. This can lead to too much pollution, too much traffic congestion, and other problems.

There are a number of ways to address the problem of external costs. One way is to regulate the activities that create them. For example, the government can regulate pollution by setting emission standards. Another way to address external costs is to tax the activities that create them. For example, the government can tax gasoline to reduce traffic congestion.

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