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Air pollution is an externality

In economics, some decisions affect third parties. These parties are affected by the decision in a positive or negative way, but they did not choose to do this. This is known as externality, or external effect. The problem with externalities is that no one pays for the cost of these effects. Usually, they are not part of the decision process. Externalities are often a form of market failure. In many cases, actors like states need to become active.

An example of such an externality is the pollution of the environment. One way to solve this is to introduce taxes on the goods that cause the polution, for example, on carbon dioxide, which is the one of the causes of global warming. With concepts such as emissions trading, these externalities can again become part of the system (and are no longer external).