Externalities, Public Goods, Income Inequality, and Poverty

Flashcards covering key concepts related to externalities, public goods, environmental policy, income inequality, and poverty, based on lecture notes.

Externality

An externality arises when an action or transaction affects a third party who is not involved; a positive externality provides benefits to others, while a negative externality produces costs to others.

Coase Theorem

In the presence of an externality, if transaction costs are small, the resulting allocation of resources will be efficient regardless of the initial allocation of property rights.

Public Goods

Exhibit nonrivalry (consumption by one does not reduce the utility to others) and nonexcludability (once provided, it is not possible to exclude others from enjoying it).

Common Resources

Nonexcludable but rival, leading to potential overuse and the 'Tragedy of the Commons.'

Government Failure

Occurs when public policies do not bring about an optimal allocation of resources, or when the incentives of politicians and government bureaucrats are not in line with the public interest.

Marginal Damages (MD) Curve

Shows the change in damages from a change in emissions.

Marginal Abatement Costs (MAC) Curve

Shows how costs rise as emissions are reduced.

Command and Control Policies

A central agency sets rules for emissions, including the levels allowed, usable technologies, and enforcement.

Market-Based Policies

Using charges, taxes, subsidies, deposit-refund systems, or tradable emission permits to achieve a targeted level of emissions.

Emissions Taxes (Pigouvian Taxes)

A tax on every unit of pollution produced to achieve a socially efficient outcome.

Marketable or Tradable Permits

A regulatory body sets a maximum allowable quantity of pollution and issues permits granting the right to pollute a specific amount; these permits can be bought and sold (cap and trade).

Cost-Benefit Analysis

A method of decision-making that looks at the discounted value of future costs and benefits of a proposed policy.

Sustainable Development

The ability to meet the needs of the present without compromising the ability of future generations to meet their own needs.

Income

A flow measure reflecting the funds received by individuals or businesses over a specific period.

Wealth

A measure of an individual’s or a family’s assets, net of liabilities, at a given time.

Functional Distribution of Income

Splits income among the factors of production (e.g., wages, proprietor’s income, rent, corporate profits, net interest).

Personal or Family Distribution of Income

The distribution of income to individuals or household groups, typically by quintiles.

Lorenz Curve

A graph that illustrates the distribution of income or wealth, cumulating households and their share of total income.

Gini Coefficient

The ratio of the area between the line of perfect equality and the Lorenz curve to the area under the line of perfect equality; measures income inequality.

Poverty Thresholds

Developed in the 1960s based on the USDA’s food plan and updated each year by the Census Bureau to account for inflation.

Income Deficit

The difference between the poverty threshold and a household’s income.

Ratio of Income to Poverty

Measures a household’s income as a percentage of the poverty threshold.

Rawls Maximin Principle

A society should maximize the welfare of the least well-off individual.