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The existence of external benefit and external cost leads to misallocation of resources. External cost For example, when drivers are not liable for the health damage of car exhaust, drivers will equate only marginal private cost with marginal benefit. But if drivers are forced to pay for the health damage of car exhaust, their marginal cost will go up by the amount of the external cost.
Internal costs. â. Internal costs are easy to see and explain. They are costs that a business bases its price on. They include costs like materials, energy, labour, plant, equipment and overheads.