Divergences Between Marginal Social and Private Net Product — A. C. Pigou
The Langenderfer Library: Classics in Tax, Economics, and AccountingShow Notes
Why can private decisions produce socially harmful outcomes even when individuals act rationally? In this foundational passage from The Economics of Welfare, A. C. Pigou examines divergences between marginal private net product and marginal social net product—the gap now known as an externality.
Using examples involving smoke, congestion, industrial location, investment, and spillover effects, Pigou explains why market prices may fail to capture costs or benefits imposed on others. He then considers taxes, subsidies, regulation, and other public remedies, laying the intellectual groundwork for modern welfare economics, environmental policy, and the “Pigouvian tax.”
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