Externalities arise when a choice imposes costs or benefits on someone who is not part of the decision. Modern life abounds with examples of both positive and negative externalities. Externalities can be thought of as a situation in which some of the costs or benefits are "external" to the decision maker. The problem is that "external" costs are usually ignored.

  Suppose you purchase gasoline for your car. When you drive, you generate air pollution of several different types, thus you generate negative externalities (costs) for those who have to breathe the pollution, who had no input into how much gasoline you bought or into your decision to drive.

   Suppose you decide to plant some trees in your yard. They help beautify your neighborhood and perhaps slightly increase property values for your neighbors. In this way you generate a positive externality (benefit) for your neighbors.

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