GATE (Graduate Aptitude Test in Engineering) Economics (XH-C1) Public Economics-Market Failure and Remedial Measures Study Material (Page 4 of 4)

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Externality

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An externality is present whenever some economic agents′ welfare, that is utility or profit is directly affected by the action of another agent, that consumer or producer in the economy. By directly we exclude any effects that are mediated by prices, for example, an externality is present if a Fishery՚s production is affected by the river pollution of upstream oil refinery but not if the Fishery՚s profitability is affected by the price of oil. The latter effect often called precautionary externality and is present in any competitive market but creates no inefficiency.

Types of …

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