Externalities are spill over effects on 3rd parties that are not involved in an economic transaction. Externalities can exist both in production and consumption and externalities can be both positive and negative meaning there is a benefit or a loss to the 3rd party. The causes of externalities being the market forces of supply and demand are not allocating the resources efficiently. The types of goods associated with externalities are merit (underproduced and underconsumed and have positive externalities) and demerit (over produced and over consumed and have negative externalities) goods and missing markets (not provided by the market at all – free rider problem and they may a very high investment needed). Some externalities like pollution etc. are also called ‘public bad’. Externalities can cause inequality and poverty as poor people can be driven out of the market due to higher prices and therefore the government has to intervene to correct market failure.