Externalities are costs or benefits that exist outside of the market mechanism and are not reflected in prices. They occur when social costs and benefits differ from private costs and benefits, leading to a misallocation of resources. External costs of production include pollution from cars increasing air pollution. External benefits of consumption can be both private, like enjoying music, and social, like providing entertainment to others. Government intervention may be needed to address positive externalities like research and development or education.

1. Externalities is a cost or benefit not
transmitted trough prices ,it is the
outside the Market Mechanism .

2.  Externalities are created when social costs and
benefits differ from private costs and benefits .

3.  Market prices and profits can be misleading as
they are not the true value prices and profits to
the society .

4.  Market putting wrong signals leading a
Misallocation of resources.

5.  External costs of production
By driving a car consumers increase the amount
of pollution.

6.  External benefits of consumption
By listening to music ,the pleasure can be private
(only for a person or specific group of people )
and also can be social (provide
enjoyment/entertainment to the others around
you )

7.  For example consumption , consumer can
create externalities like :
-pollution from cars and Motorbikes
-Litter on streets and in public places
-Vandalism of public property

8.  Positive externalities create mostly benefits ,ex:
-research and development -> government
intervention (subsidize it )
-education (consumption) -> social benefit is
greater than private benefit

9.  Moral codes and social sanctions
 Voluntary organization
 Internalization (when activities with
complementary externalities are merged into
one firm ,thus eliminating the externality )
 Contracts –Parties through negotiation can
agree as to how to regulate the externality .

10.  http://tutor2u.net/economics/content/topics
/externalities/what_are_externalities.htm
 http://users.hunterlink.net.au/~ddhrg/econ/
ext1.html
 http://www.econlib.org/library/Enc/Externa
lities.html
 Etc.