Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 27

If one firm raises the costs of another firm by bidding against it for its inputs, that is not an externality by our definition. But, if a firm raises the costs of another firm by polluting the environment, that is an externality. Explain the distinction between these two situations. Why does the second lead to an inefficient allocation of resources but the first does not?