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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 indirect cost rate is a device for equitably allocating indirect costs to projects.An indirect cost rate is a mathematical computation that is the ratio between the total indirect costs (pool) and an equitable direct cost base. The indirect cost system an organization develops depends primarily on the size and type of organization.