Economics becomes a science · 1770s–1920s
1920
Costs that fall on others
Arthur Pigou explains externalities and proposes taxing the harm.
In The Economics of Welfare (1920), Arthur Pigou described costs that fall on people outside a deal, such as smoke from a factory, and proposed taxing the activity by the harm it does.
💡 Why it made sense then
Industrial cities were polluted, and markets alone gave factories no reason to count the damage.
Ideas it gave us
- 🏗️ Externality
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.
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