Externalities are another important market failure. Recali that externalities arise when some of the side effects of production or consumption are not included in market prices. For example, a power company might pump sulfurous fumes into the air, causing damage to neighboring homes and to people’s health. If the power company does not pay for the harmful impacts. pollution will be inefficiently high and consumer welfare will suffer.
Not all externalities are harmful. Some are beneficial, such as the externalities that “come from knowledge generating activities, For example, when Chester Carlson invented xerography, he became a millionaire: but he still received only a tiny fraction of the benefits when the world secretaries and students were relieved of billions of hours of drudgery. Another positive externalize arises from public- • health programs, such as inoculation against smallpox, cholera, or typhoid; an inoculation protects not only the inoculated person but also others whom that person might otherwise have infected.
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