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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.
When external cost or external benefit is present, the market price for the activity that generates external cost or external benefit is too low to be efficient. When these externalities are internalized, price will go up in both cases.