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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.
External costs are costs that are NOT included in what the business bases its price on. These include: the cost of disposing of the product at the end of its useful life; the environmental degradation caused by the emissions, pollutants and wastes from production; the cost of health problems caused by harmful materials and ingredients