Externality

Cost or benefit of an activity that falls on third parties and so escapes the actor's own price calculation.

Specifications & Metrics

type

Public economics

introduced

1920

originator

Arthur Pigou

Core Principles & Analysis

• Pigou's Economics of Welfare (1920) proposed corrective taxes equal to the marginal external cost.
• Carbon pricing is the textbook Pigouvian tax applied to greenhouse gas emissions.
• Positive externalities, such as basic research spillovers, argue for subsidies rather than taxes.

Sources

• Econlib Concise Encyclopedia of Economics: Externalities