Microeconomics › Section L · Environmental protection and negative externalities › Topic L.1
The economics of pollution
A price tags every cost a seller pays - and leaves every cost someone ELSE pays completely invisible. That blind spot is the externality, and pollution is its textbook case: markets overproduce whatever harms third parties, and efficiency needs a way to price the harm back in.
In this topic
- What an externality is
- The arithmetic of social cost
- Overproduction: the negative case
- Worked example: two equilibria, one river
- The positive mirror: underproduction
- Production, consumption and network externalities
- The efficient amount of pollution is not zero
- Worked example: how clean is clean enough?
- Global and intergenerational externalities
- Common mistakes to avoid
- Key takeaways
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