Externalities

The concept of externalities is instructive for the study of consumption and consumers insofar as it considers the public consequences of private consumption. Conventional microeconomic theory suggests that in a freely operating market, prices are a reflection of costs and benefits and so they act as signals for economic decision makers—be they individuals, firms, or nation-states. Consequently, the market will ensure an efficient allocation of resources insofar as the appropriate quantities of goods and services will be produced (and consumed) in terms of overall costs and benefits to society. Externalities represent a market failure through which the actions of one economic agent affect the welfare of another and for which no price or opportunity for compensation exists. The result of this market failure is that ...