The Economist

Illustrations for four briefs about great economic theories and ideas.

Or the law of markets, in classical economics, states that aggregate production necessarily creates an equal quantity of aggregate demand.

A Pigouvian tax is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. An often-cited example of such an externality is environmental pollution.

Policymakers have spent half a century in search of the natural rate of unemployment. The problem is, if you try to manipulate it artificially, markets will bite back sending inflation trough the roof.

The intergenerational logic lies behind the “pay-as-you-go” (PAYG) pensions common in many countries. People contribute to the scheme during their working lives, and receive a payout in retirement. Many people fondly imagine that their contributions are saved or invested on their behalf, until they reach pensionable age. But that is not the case. The contributions of today’s workers pay the pensions of today’s retirees. The money is transferred between generations not across time.