An economic externality exists whenever the well-being of some individual is affected by the economic activities of others without particular attention to the welfare of that individual. For example, smog-related illnesses such as bronchitis and exacerbated cases of childhood asthma have been blamed, to some extent, on the emissions of nitrogen oxides from automobiles and large fossil-fuel-burning power plants. These illnesses have high treatment costs that are not incorporated in the related electricity-production and oil-consuming activities of the power plant and transportation industries, and must therefore be borne by the affected third parties. Air pollution sort is a classic example of an economic externality, and is called a negative externality because it has external costs.

Many environmental problems arise from externalities of energy exploration, production, refining, distribution, and consumption. This is especially so for fossil fuels. Air pollution, global warming and climate change, and acid rain...