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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.
Costs associated with a product can be categorized as direct costs and indirect costs. Direct cost, is the cost which can be identified with the product, while indirect costs are not directly accountable to a cost object. Cost of materials, direct labour cost such as wages and salaries are examples of direct costs. Administrative costs and depreciation are some of the examples of indirect costs.