Editing Externality (section)

==Implications==
<!-- I have suspended this paragraph because it is so poorly written as to be indecipherable. It so bad that it doesn't even deserve a [[template:confusing]] tag:
The implications caused as a result of externalities can be both positive and negative. If two separate businesses agree to allow their activities to affect each other then it is mutually beneficial, because they would not agree to it in the first place if it was going to be damaging to their business. However, other external parties can also be affected by the deal without their knowledge or the other businesses' knowledge. Unlike the original transaction as the third party did not agree it could provide both positive and negative implications.<ref>Laffont JJ. (1989) Externalities. In: Eatwell J., Milgate M., Newman P. (eds) Allocation, Information and Markets. The New Palgrave. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-20215-7_11</ref>
-- end of suspended paragraph -->

A voluntary exchange may reduce societal welfare if external costs exist. The person who is affected by the negative externalities in the case of [[air pollution]] will see it as lowered [[utility]]: either subjective displeasure or potentially explicit costs, such as higher medical expenses. The externality may even be seen as a [[trespass]] on their health or violating their property rights (by reduced valuation). Thus, an external cost may pose an [[ethical]] or [[political]] problem. Negative externalities are [[Pareto efficiency|Pareto inefficient]], and since Pareto efficiency underpins the justification for private property, they undermine the whole idea of a market economy. For these reasons, negative externalities are more problematic than positive externalities.<ref>{{cite web |last1=Caplan |first1=Bryan |title=Externalities |url=https://www.econlib.org/library/Enc/Externalities.html |website=The Library of Economics and Liberty |publisher=Liberty Fund, Inc. |access-date=28 January 2020}}</ref>

Although positive externalities may appear to be beneficial, while Pareto efficient, they still represent a failure in the market as it results in the production of the good falling under what is optimal for the market. By allowing producers to recognise and attempt to control their externalities production would increase as they would have motivation to do so.<ref>{{cite journal | url=https://doi.org/10.1111/j.1467-937X.2005.00355.x | doi=10.1111/j.1467-937X.2005.00355.x | title=Negative Externalities and Evolutionary Implementation | date=2005 | last1=Sandholm | first1=William H. | journal=The Review of Economic Studies | volume=72 | issue=3 | pages=885–915 }}</ref> With this comes the free rider problem. The [[free rider problem]] arises when people overuse a shared resource without doing their part to produce or pay for it. It represents a failure in the market where goods and services are not able to be distributed efficiently, allowing people to take more than what is fair. For example, if a farmer has honeybees a positive externality of owning these bees is that they will also pollinate the surrounding plants. This farmer has a next door neighbour who also benefits from this externality even though he does not have any bees himself. From the perspective of the neighbour he has no incentive to purchase bees himself as he is already benefiting from them at zero cost. But for the farmer, he is missing out on the full benefits of his own bees which he paid for, because they are also being used by his neighbour.<ref>{{cite web |last=Rasure |first=E|date=December 29, 2020 |title=Free Rider Problem |url= https://www.investopedia.com/terms/f/free_rider_problem.asp#:~:text=The%20free%20rider%20problem%20is,any%20community%2C%20large%20or%20small |website=Investopedia}}</ref> 
[[File:Graph of Positive Externality in Production.png|thumb|Graph of Positive Externality in Production]]

There are a number of theoretical means of improving overall social utility when negative externalities are involved. The market-driven approach to correcting externalities is to '''''internalize''''' third party costs and benefits, for example, by requiring a polluter to repair any damage caused. But in many cases, internalizing costs or benefits is not feasible, especially if the true monetary values cannot be determined.

[[Laissez-faire]] economists such as [[Friedrich Hayek]] and [[Milton Friedman]] sometimes refer to externalities as "neighborhood effects" or "spillovers", although externalities are not necessarily minor or localized. Similarly, [[Ludwig von Mises]] argues that externalities arise from lack of "clear personal property definition."