Externalities
Market failures occurring when production or consumption imposes uncompensated costs or benefits on third parties.
The Pigouvian Solution
A Pigouvian tax is a tax levied on a market activity that generates negative externalities (e.g., carbon emissions). The tax is set equal to the marginal external cost, forcing the firm to internalize the damage.
The Coase Theorem
Ronald Coase argued that if property rights are well-defined and transaction costs are zero, private parties can bargain to an efficient outcome regardless of who holds the initial rights.