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SOLVED: 1. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a positiveV externality. The following graph shows the demand and supply curves for a good with this type of externality, The dashed drop lines on the graph reflect the market equilibrium price and quantity for t
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