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When does an externality exist?

When a transaction imposes a benefit (positive) or a cost (negative) to a third party who had no say on the consequences of that deal occurring.


When will markets not reach efficiency (with specifics to healthcare)?

Markets may not often reach efficiency when the private welfare is lower than the social welfare. This is often true in the case of flu vaccines and herd immunity - if I was to undertake the costs of getting a flu jab, the benefits to society are much greater than they are to me. If a social planner existed and chose the level of social demand for vaccines, this would create an even further social benefit.

Markets may otherwise not achieve efficiency if the social cost is greater than the private cost. A negative externality may exist in the presence of antibiotic resistance. The cost to society of needlessly prescribing antibiotics (bacteria becoming more resistant) is greater than private cost due to further r&d costs as well as decreased health. Social loss will exist in such scenarios.