Using mathematical formulation, show that in the presence of externalities, the price taking profit maximising behaviour will not necessarily lead to an efficient allocation of resources.

The importance of externalities in actual resource allocation is best seen by studying cost- benefit analyses. Such a cost-benefit analysis is Barretts and Mooneys cost benefit study of the Naas Motorway Bypass. This study showed how the construction of the bypass resulted in significant positive externalities and a few negative ones.

There were three main positive externalities. The first was a time savings of 10.28 minutes from reduced traffic congestion in Naas centre at peak hours accounting for 90.5 per cent of the total benefits from the bypass, making the social feasibility of the project was very dependent on this positive externality. The second was a reduction in road accidents in Naas centre due to the transfer of traffic to the safer motor way, while the third was a fuel saving accounting for 2.6 per cent __________ __________ _________ _____ ___ ________ ____ _____ ___ _______.
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