BackPublic Solutions to Externalities definitions
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1/15BackSkip to main contentBackExternality
A cost or benefit impacting individuals not directly involved in a market transaction, such as pollution or education. Internalization
The process of incorporating external costs or benefits into market decisions, ensuring all effects are accounted for. Command and Control Policy
A government approach that mandates or prohibits specific behaviors through laws or regulations. Market-Based Policy
A government strategy using incentives like taxes, subsidies, or permits to influence market outcomes. Corrective Tax
A charge imposed to align private costs with societal costs, reducing overproduction of goods with negative effects. Subsidy
A financial incentive provided to increase production of goods with positive effects, raising their efficient quantity. Pigovian Tax
A specific tax equal to the external cost, designed to achieve the socially optimal level of production. Negative Externality
A harmful effect on third parties, such as pollution, not reflected in market prices. Positive Externality
A beneficial effect on third parties, such as education, not captured by market prices. Marginal Social Cost
The total cost to society from producing one more unit, including both private and external costs. Marginal Social Benefit
The total benefit to society from consuming one more unit, including both private and external benefits. Quantity Limit
A restriction set by authorities on the maximum amount of a good or activity, such as pollution. Pollution Permit
A tradable allowance granting the right to emit a specific amount of pollution, creating a market for pollution rights. Equilibrium Quantity
The level of output where all costs and benefits, including externalities, are considered, achieving efficiency. Tax Revenue
Funds collected from imposed taxes, which can be used for public purposes like environmental protection.
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