"Private costs of behavior are different from the social cost" (Naked Economics)
Prices don't capture all of the cost of the transaction;
instead some of the cost is paid by a third party
which has nothing to do in the decision.
Adjust price so that it concurs with the total cost.
INTERNALIZING THE COST → Imposing a tax equal to the
difference between the private price and social cost.
To force buyer and seller to pay the FULL COST.
This is known as market failure. Market Failure is the examination of a particular instance in which the free market, private consumers and sellers interact with each other, and equilibrium level of output actually reduces the level of walfre in society.
However, one of the solutions is to charge the external cost to
individuals or firms as they make decisions.
SOCIAL COST= private cost + external cost