The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd


  • J. J. Laffont
Reference work entry


Externalities are indirect effects of consumption or production activity, that is, effects on agents other than the originator of such activity which do not work through the price system. In a private competitive economy, equilibria will not be in general Pareto optimal since they will reflect only private (direct) effects and not social (direct plus indirect) effects of economic activity. This article explains how this outcome arises and considers the policy responses that have been advanced to remedy the market failures stemming from externalities.


Asymmetric information Coalitions Competitive equilibrium Cooperative game theory Environmental economics Externalities Imperfect information Lump-sum transfers Non-convexity Pecuniary externalities Pollution rights Strategic behaviour Taxation of externalities Technological externalities 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • J. J. Laffont
    • 1
  1. 1.