Unit 3 Economics

Market failure

the failure of the market to allocate resources efficiently

Externality

the side effect of consumption or production that has consequences on people other than the consumers or producers

External Benefit

when producing or consuming a good causes a benefit to a third party

External Cost

when producing or consuming a good or service imposes a cost (negative effect) upon a third party.

Negative Consumption Externality

the external cost of consumption that has consequences on people other than consumers

Positive Consumption Externality

the external benefit of consumption that has consequences on people other than consumers

Negative Production Externality

the external cost of production that has consequences on people other than producers

Positive Production Externality

the external benefit of production that has consequences on people other than producers

Marginal Private Costs

the cost to producers of producing one more unit of a good

Marginal Social Costs

costs to society of producing one more unit of a good

Marginal Private Benefits

benefits to consumers from consuming one more unit of a good

Marginal Social Benefits

benefits to society from consuming one more unit of a good

How to fix a negative production externality

government regulation, tradeable permits, taxes

Negative Consumption Externality Correction

taxes, negative advertising, government regulations

Positive Production Externalities Corrections

subsidy, government provision

Positive Consumption Externality Correction

legislation, government provision, subsidy

rivalrous good

a product that can only be consumed by one person, preventing another person from consuming it at the same tim

non-rivalrous good

one person's consumption of a good does not reduce the amount available for others to consume

excludability

the degree to which a good can be limited to only paying customers.

excludable good

A good is excludable if people people who have not paid for it can be prevented from using it

non-excludable good

a good that is difficult or impossible to prevent people from consuming, even if they don't pay for it

Private Goods

rivalrous excludable goods

Club/Collective Goods

non-rivalrous excludable goods

common goods

rivalrous non-excludable goods

Public Goods

non-rivalrous non-excludable goods

Actions to solve the depletion of common goods

don’t consume a good faster that it’s produced, carbon taxes, cap and trade systems, legislation, subsidies, collective self-governance

Carbon Tax

a per unit tax on carbon emissions

Limits of Carbon Taxes

hard to measure cost of pollution, might urge nuclear energy use which has its own issues, fossil fuels are inelastic to taxes, regressive

Regressivity

affecting lower income people more than higher income people

Strengths of Carbon Taxes

effective when: tax = externality so firms are encouraged to produce at social optimums

Cap and Trade System

a system where governments sell tradable permits to pollute to businesses. they can regulate emissions are regulating the amount their sell

Strengths of Cap and Trade

encourages firms to develop clean tech, brings government revenue for monitoring systems and enforcement

Limits of Cap and Trade

may be hard to monitor emissions, hard to find socially optimum price, ineffective if non-gov resellers jack up prices

Legislation that stops the depletion of common goods

licenses for common good use, limits to how much a person can collect, restricting how they can be acquired

Strengths of Legislation

effective when laws are specific and easy to enforce

Limits of Legislation

balancing strictness with environmental and social demands is hard, costly to prosecute uncooperative firms, making sure not to run businesses out of the market and cause unemployment

Collective Self-Governance

when resource users establish, monitor, and enforce their own rules for managing shared resources without relying solely on external state or market mechanisms. requires community autonomy and mechanisms for accountability

Strengths of Collective Self-Governance

stakeholders are experts in noticing the depletion or growth of their good, effective when stakeholders communicate and have strong agreements about policy enforcement

Limits of Collective Self-Governance

unequal power and interests between stakeholders makes agreement difficult

Free Rider

someone who benefits from a good they didn’t pay for

Why do public goods show market failure?

the free rider problem discourages firms from producing public goods

How the government adresses externalities and public goods

quotas, tolls, privatization

Quota

limits on an action???

Privatization

making a publicly (gov) owned resource privately owned