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Report - Essay Example ket that is really efficient in which the voluntary exchange is mutually beneficial in terms of the value agreed upon between these two parties based on freely-available information. However, a truly efficient market is only in theory because no matter how people will try to be efficient, there will always be distortions in a capitalist market. The distortions can be the lack of adequate or timely information, resulting in less than optimal distribution of the goods and services produced within a certain economy. The sub-optimal distribution results in what we call as an externality to the two-party transaction that involves other third parties not included specifically in that transaction between a seller and a buyer. As used in economics theory, externalities refer to the so-called transaction spill-over effect in which the actual costs or benefits of a product or service are not fully transmitted in the prices. In other words, the actual price being agreed upon between seller and buyer is not the actual cost of production because of market inefficiencies or there might be unintended benefits to third parties other than the buyer. Externalities can even cause significant social problems if not at all examined, checked and corrected immediately (Hunt, 2002, p. 397). Externalities are defined by economists as the unintended result in terms of benefits or costs to other third parties. This means some people will end up carrying the burden of costs although they are not a party to the transaction (spill-over effects) or conversely, a third party will benefit somehow although he or she is not the buyer of a particular product or service. There are many examples of externalities in capitalist societies because externalities are one form of the so-called market failures which in turn results when the allocation of goods and services in a free market is not totally efficient. A free capitalist market is supposed to be self- regulating in which the best interests of