Pricing mechanisms can address externalities from "summary" of Economics of the Environment by Robert N. Stavins
Pricing mechanisms play a crucial role in addressing externalities, which are costs or benefits that affect individuals not directly involved in a market transaction. When producers and consumers do not consider these external costs or benefits, markets fail to allocate resources efficiently. By internalizing externalities through pricing mechanisms such as taxes or subsidies, the true social costs or benefits of production and consumption can be reflected in market prices. This leads to a more efficient allocation of resources, as producers and consumers ar...
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