Studied by 5 peoplepersonal cost
the amount the buyer pays for a good
social cost
the amount a buyer pays + cost to society
externalities (external costs)
personal costs, social costs
external benefits
people don’t see the societal benefits of things, so they don’t get done
personal benefit
benefit buyer gets from buying a good
social benefit
benefit to buyer + benefit to society
market failure
overconsumption
Marginal Social Cost (MSC)
additional cost to society from each additional unit (slopes upward)
Marginal Social Benefit (MSB)
additional benefit from each additional unit (slopes downward)
negative externality
social costs are higher than personal costs (do less!)
positive externality
social benefit is greater than personal benefit (do more!)
Pigouvian Tax
unit tax on external cost (to eliminate negative externality)
lump-sum tax
doesn’t impact DWL
nonexcludable
anyone can use it
nonrivalrous
one person’s consumption doesn’t prevent someone else from using the good (e.g. roads)
free rider problem
people get away with using public goods with no personal cost
overuse of public goods due to low cost
Coase Theorem
if property rights are clear, parties can negotiate to eliminate externalities
public goods
a good with external benefits (positive externality) that is produced by the government
pure public goods
must be nonexcludable and nonrivalrous
can only be produced by the government
pure public goods ex
national defense (no one in the US can simply not be protected by the US military)
lighthouses (no one can be excluded from seeing a lighthouse)
Note
Flashcard