Intro to Externalities

   Anytime externalities exist, decision makers don't face all the costs or benefits of their decisions.

   For example, in making personal health decisions most people don't consider the social costs of their health status; one might rather be comparing one's personal benefit to one's personal cost.

   Consider a student who comes to class sick. The student probably compared the cost of missing class (a lower grade) with the personal cost of attending (feeling bad, prolonging the illness) and decides to attend. The student probably doesn't consider the social cost of transmitting the disease to other students. In a large class the decision to attend while ill could conceivably do many thousands or even tens of thousands of dollars of harm in sick days on the part of many students.

   Unfortunately, there is no incentive for our sick student to take these costs into account. There are many examples of negative externalities, some maybe not as obvious as pollution, but still potentially having a negative impact on others in society.

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