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externalities

May 26, 2010

A major justification for regulation is that markets are not always efficient in pricing the full cost or value of a transaction. When this happens, regulation is needed to address what are called “externalities.” This is not a difficult concept but sometimes non-economists find it perplexing. Here’s an easy way to understand it in pure economic terms: dead miners, dead oil rig workers and dead marshes that were once lush and green are “externalities.” So are lots of the folk who lost their jobs recently.

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