The principle that those causing adverse externality should compensate the victims. There are two different points involved here. The economic benefit of ‘making the polluter pay’ is that it creates an incentive to avoid creating pollution, unless avoiding it is too expensive to be worth while. This internalizes the externality concerned, and makes for economic efficiency, whether or not the charge the polluter pays goes to the victims of pollution. Where these are widely diffused it may be impossible or too expensive to identify and compensate them. Compensating the victims may be appealing on grounds of equities, but is irrelevant to efficiency. It may indeed create inefficiency: if the victims could have avoided being damaged at low cost by changing their own conduct, getting compensation for actual damage may lead to too little evasive action being taken. On efficiency grounds, if the victims of externalities are compensated at all, it should only be for unavoidable damage.

• actuary
• adaptive expectations
• adequacy, capital
• adjustable peg
• adjustment
• adjustment costs
• adjustment, price and quantity
• adjustment programme
• adjustment to factor cost
• administered price
• administration
• ad valorem tax
• Advance Corporation Tax
• advances
• advantage
• adverse selection
• adverse supply shock
• advertising
• Advisory, Conciliation and Arbitration Service
• AFDC
• AFL-CIO
• after-sales service
• after-tax income
• age-earnings profile
• agency