In the case you are describing, where the ad is displayed but clicking on an ad causes a message that the page can not be displayed, the advertiser is not being charged. Each ad on a Google PPC block points to an interstitial page which records the click and some data about the clicker (IP address, browser information, etc) then passes the user to the landing page. It is this interstitial page that is being blocked by the hosts.txt file. If your browser can not get to the interstitial page, Google has no way to know that the click occured, and will not charge the advertiser.

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