Define Externalities. Explain how externalities lead to market failure. How does a negative production externality allocate resources inefficiently? Use appropriate diagram to support your answer

Externalities are the economic effects that are imposed on individuals or firms who did not choose to incur them. They refer to the impacts of an economic activity on a third party who is not involved in the transaction. Externalities can be positive or negative. Positive externalities refer to benefits received by a third party, while negative externalities refer to costs imposed on a third party.

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