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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.
An entityâs cost of capital is an average of the costs of all the finance sources within the company weighted by the total market value of each source. Consider, for example, a company with three sources of finance: equity, preference shares and debt (see table 1).n entityâs cost of capital is an average of the costs of all the finance sources within the company weighted by the total market value of each source. Consider, for example, a company with three sources of finance: equity, preference shares and debt (see table 1).