Pigou is most famous for his theory of externalities, which is the idea that the production or consumption of a good or service can generate costs or benefits that are experienced by a third party. According to Pigou, when externalities are present, the market will fail to allocate resources efficiently, and corrective taxes or subsidies may be necessary to bring the private costs and benefits of a good or service into alignment with the social costs and benefits. Pigou's ideas have been influential in the development of policies designed to address negative externalities, such as pollution or congestion.