ABSTRACT
Goods and “bads” that go unpriced and are therefore external to the price-system are referred to as “external effects” or, more briefly, as “externalities” or “spillovers', especially when – as in the example of traffic noise or of smoke emitted by a factory – they are not deliberately produced but are simply an incidental side effect of the productive process or of economic activity in general. The question posed by the chapter title can be rephrased: If all goods were produced under conditions of perfect competition (let us say that everywhere price is equal to marginal factor cost) would the resulting allocation be ideal in the presence of externalities?
