Chapter 5 Externalities & Public Goods

Coase Theorem

If bargaining is costless and property rights are clearly established, then externality problems can be solved by private bargaining

MB > MC

Reduction of pollution is good

MB < MC

Reduction of pollution is bad

MB = MC

There is a net benefit for society regarding pollution

Pigovian Tax

Tax on activities that cause negative externalities

Command-and-Control Approach

Policy that sets a qualitative limit on the amount of pollution firms can emit

Cap and Trade Approach

Vouchers that let firms pollute to a limit, vouchers can be bought or sold between firms

Transaction Cost

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods and services

Rivalry

When one person’s consumption of a good means no one else can consume it

Excludable

When anyone who does not pay for the good cannot consume it

Nonrival

When one person’s consumption does not reduce the availability of the good for others

Nonexcludable

Type of good or service which is impossible to prevent people from consuming, whether they paid for it or not

Private Good

A good that is both rival and excludable

Public Good

A good that is both nonrival and nonexcludable

Free Riding

Benefiting from a good without paying for it

Quasi-Public Good

Excludable and Nonrival

Ex. Streaming Services

Common Resource

Nonexcludable and Rival

Tragedy of the Commons

The tendency for a common resource to be overused