Externality
Also called: negative externality, positive externality, Pigouvian tax
An externality is a cost or benefit that falls on people outside a transaction. Pollution is a negative externality; vaccination, which protects others, is a positive one.
Because the buyer and seller ignore it, markets overproduce goods with negative externalities and underproduce those with positive ones. A Pigouvian tax charges for the external cost to correct it.
Related terms
- Market failure: Market failure is when a free market, left alone, doesn't produce the efficient outcome.
- Public good: A public good is non-excludable (you can't stop people using it) and non-rival (one person's use doesn't reduce another's), like national defence or a lighthouse.
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