Externalities

Sonia Schwartz

Chapter 59 in Elgar Encyclopedia of Energy Economics, 2025, pp 223-225 from Edward Elgar Publishing

Abstract: An externality is a non-market process that has no price. As a result, production costs no longer reflect social costs and the competitive equilibrium is no longer a Pareto optimum. In order to restore the first theorem of welfare economics, externalities must be internalised. According to Coase (1960), if property rights are properly assigned and respected in the economy, the socially optimal level of externalities will be achieved through a bargaining process. Pigou (1932) suggests taxing – or subsidising – the externality emitter in order to correct the price signal. Crocker (1966) and Dales (1968) raise the possibility of creating a market for the externality. Economic theory analyses and compares these solutions on the basis of various hypotheses. Other means are currently being explored, such as nudges or voluntary approaches to internalising externalities. The notion of externality is at the core of environmental economics, endogenous growth theory and geographical economics.

Keywords: Externalities; Pigou; Coase; Regulation (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035310364
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