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Individuals who live and work in the neighbourhood bear costs arising from the factory's production, including adverse health effects and clean-up costs.
A beneficial externality occurs, for example when Mr Francois paints his house and enhances his neighbours' views and the values of their properties.
Externalities arise with any interdependency of household utility or firm production functions that is not reflected in market prices. Such externalities result in inefficiency and are nonpecuniary externalities. However, when all affected parties have directly operated through the market price system, they are identified as pecuniary externalities, and pose no inefficiency...
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