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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.
1. Internal costs described in the technical assistance paper would include such. items as salaries, wages, benefits, and travel for employees of the bidder. External. costs would include payments to non-employee parties such as lawyers, consultants, and engineers.