Sometimes in a transaction there are costs or benefits that nobody pays for. Economists call them externalities. Externality is any private behaviour that has a spill over effect on somebody else who is not involved in transaction, and that transaction can be positive or negative.

Ex) Positive externality: beautiful garden in front of house will make people happy (Benefit for many people, free rider)

Negative externality: mostly caused by environmental activities and pollution (Causes extra costs)

Economists say that market failure happens when there are costs and no one wants to pay for them. Economists also think that people should feel guilty because we are not paying enough for daily products which causes externalities, and pass on to others to pay for our externality costs. Moreover, nature gave us so much positive externalities land, water, and fresh air; however, people harm the nature in order to live easier life by developing technology. Positive externality for neighbourhood building owners – they watch the Chicago cups for free in the building and baseball filed owners do not like them watching baseball game for free so they plan to put wind screen to block the view. Now, by law, those building owners have to pay to watch the game.  Government often get into taxation and policy in order to manage fair externalities so that no one can take advantage or get harmed by externalities. Furthermore, Negative secondary effect is another way of saying externality. Strip club owners in Huston are forced to pay for externalities fee which city counsellors think that strip clubs promotes more sexual crime. And, the counsellor made a statement by saying that when people pay for gasoline, they also pay for extra tax for environmental fee, which is arguable theory.

The final questions is how to calculate the negative externalities and who should pay for them?