Monday, March 8, 2010

Arthur Pigou

In a number of courses that I teach, we talk about the case where markets do not allocate resources efficiently of their own accord. This can happen for a number of reasons, but here I want to consider the case when the costs to the firm are different than the costs to society or when the benefits to the consumers are different than the benefits to society. When this happens, these are referred to as either demand-side or supply-side externalities. The Wall Street Journal has a really good piece on the economist who developed this idea: Arthur C. Pigou. It is well worth the time to read, as his ideas explain how the tanking of the sub-prime housing market should be handled using government policy, or how we can use taxes to increase social welfare (i.e. economic well-being).

No comments: