Externality

High school (ages 12+)
Mathematics & Numbers

Name:

Date:

Step 1 · Read the article

Open the article and read it at the level above. Then answer the questions below in your own words.

https://smallwhale.org/articles/externality

Write what each word means, using the article.

Do not copy the article. Write two things you learned, the way you would explain them to a friend.

Answers below are taken from the article’s stored facts, so they match what the student read.

1. What is the core issue?Divergence between private costs/benefits and social costs/benefits, leading to market failure
2. What is the proposed solution (pigou)?Pigouvian tax to internalize negative externalities and achieve Pareto optimality
3. Why can pollution from a factory be an externality?The factory’s waste hurts the river and the people who use it, but the factory doesn’t pay for that damage. This hidden cost is an externality.
4. How can a government fix a bad externality?By putting a tax on the activity that equals the extra cost it causes. This makes the producer think about the damage and can reduce the bad effect.

Third-Party Effect: An impact on individuals or groups not directly participating in an economic transaction.
Market Failure: A situation where the free market fails to allocate resources efficiently due to externalities, information asymmetry, etc.
Pigouvian Tax: A tax levied on an activity that generates negative externalities, aiming to correct for societal costs.
Pareto Optimality: A state where resources are allocated such that no individual can be made better off without making another worse off.