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ECO 365 Week 4 DQ 1 What is an externality? Provide at least three examples.

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What is an externality? Provide at least three examples. How does one of the examples you
provided affect the market outcome? What is the role of government in addressing the
implications of an externality you provided as an example? Is it possible that a
government’s solution to a market failure would worsen the failure? Explain your answer.
Externalities can be either costs are benefits that are incurred by parties who were not involved in
the action that resulted in the costs or benefits. These costs or benefits are separate from any
pricing costs or benefits. For example, when a company pollutes the air, this would be
considered to be a negative externality. The company chose to pollute, however, the individuals
and animals are facing negative side effects of breathing the polluted air. Another example
would be environmental clean up. Environmental clean up has almost no positive effect of the
company that is doing the clean up, however, it is a positive externality because it helps the
environment, which will also help all of those living in that environment. The government is
generally responsible for reducing the negative externalities as much as possible. The
government will often pass laws that restrict companies from doing things that cause negative
externalities. They also may impose regulations that businesses must comply with in order to
reduce negative externalities. Above, I mentioned pollution as a negative externality. The
government restricts pollution in many different ways, limiting the amount of pollution that
companies are allowed to emit, among many other restrictions that were put into place to reduce
pollution. In some instances, a government's solution to a market failure could worsen that
failure. For example, if a market is having problems, the government may choose to impose
regulations on this market in order to try and resolve those problems. These regulations will
generally lead to higher costs for the companies within that market, which will only worsen the
problem.

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