Internality

An internality is a term, introduced in 1993 and used in behavioral economics to describe those types of behaviors that impose costs on a person in the long-run that are not taken into account when making decisions in the present. Classical Economics discourages government from creating legislation that targets internalities, because it is assumed that the consumer takes these personal costs into account when paying for the good that causes the internality. For example, cigarettes should be taxed because of the negative consumption externalities that they impose, such as second-hand smoke, not because the smoker harms him or herself by smoking. This is because the economic assumption of rationality would pose the argument that the smoker has taken into account the damage that smoking does to himself, but still desires the cigarettes more than the long-term health.

Herrnstein, R., Loewenstein, G., Prelec, D. & Vaughan, W. (1993). Utility maximization and melioration: Internalitites in individual choice. Journal of Behavioral Decision Making, 6, 149-185. http://onlinelibrary.wiley.com/doi/10.1002/bdm.3960060302/abstract