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A negative externality occurs whenever the activity of one economic agent has a negative effect on the well-being of a third party.
Whenever production creates negative externalities the marginal social cost of production is greater than the marginal private cost.
In free markets, firms only consider the private costs of production and therefore produce at the point where demand is equal to marginal private cost.
However, production at this level represents an inefficient allocation of resources since the price charged does not equal the full marginal social cost of production.
marlinbito answered the question on July 8, 2018 at 18:50
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