Externalities

An externality is a special type of public good or public 'bad' which is 'dumped' by those who produce it on other people (known as third parties) who receive or consume it, whether or not they choose to. The key feature of an externality is that there is no market in which it can be bought or sold - externalities are produced and received outside the market, providing another example of a missing market.

As with public goods and public bads, externalities provide examples of the free-rider problem. The provider of an external benefit (or positive externality), such as a beautiful view, cannot charge a market price to any willing free-riders who enjoy it, while conversely, the…