The Economics of Welfare

Arthur Cecil Pigou was a British economist known for his work in welfare economics. His most influential work, The Economics of Welfare (1920), expanded on the concept of externalities.1

Pigou argued that externalities, which are costs or benefits imposed on third parties not involved in a transaction, lead to market failures. He proposed that negative externalities (costs imposed on others) should be addressed with taxes, while positive externalities (benefits conferred on others) should be supported by subsidies. For example, pollution is a negative externality, and Pigou suggested taxing polluters to offset the societal costs. This approach aims to internalize these external effects, making markets more efficient.12