Externality: Origins and Classifications

Abstract

Evaluating the pervasive role of externalities in the academic literature requires that we understand what it means. In this article, we give an idea of the extent of the use of externalities. We consider the development of the concept during the past century, focusing on its leading architect A.C. Pigou and how his theories affected the concept’s development. The core of this article will then argue that the term has become nearly meaningless due to its ubiquity, so we develop a classification for the major categories of externalities based on economic and legal logic. We contend that the instances in which policy actions are justified to deal with what are purported to be externalities are very small.

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