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What is an externality? How can externalities exist that require no market correction?
An externality is the effect of one party’s economic activities on another party that is not taken into account by the price system. It reflects missing markets!
nExternalities can occur between any two economic actors.
nExternalities can be beneficial or harmful.
nOne of the most famous beneficial externalities between firms
- involves one firm producing honey and the other producing apples (James Meade, 1952).
- feed on apple blossoms, which increases the production of honey, and
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