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Tuesday, February 18, 2014

Externalities: What Are They?

While not recognizable to many based on this academic sounding name, externalities are a common problem that can occur in the "Free Market".  An Externality is a side effect or outcome of two parties performing an economic transaction. The Externality will impact others that are originally not members of the transaction. The most commonly known "externality" problem is pollution. An auto manufacturer can produce cars, yet the exhaust from the manufacturing plant can be emitted into the air.  It should be recognized that Externalities can be positive or negative. Many scholars and thinkers believe that Government intervention is the most effective means of mitigating negative externalities. Is this true? Dr. Bob Murphy goes into deeper detail in this video clip:

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