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Externalities are costs suffered (or benefits enjoyed) by a party unrelated to the source of the cost or benefit.

Externalities may be negative or positive.

Negative externalities include pollution.

Postive externalities include research and development activities.

They are considered to be an important source of market inefficiencies.

Market interventions such as taxes and subsidies seek to discourage activities leading to negative externalities, and promote activities leading to positive externalities.

See also