Types of Goods and Externalities Review

Flashcards covering the classification of goods (rivalry/excludability), market failures like the free-rider problem, and the mechanics of positive and negative externalities.

Rivalry

A characteristic of a good where one person's consumption of it prevents another person from consuming that same unit, such as a chicken sandwich.

Excludability

The ability to refuse or block access to a good for those who have not paid for it, such as using a password for Wi-Fi.

Private Good

A good that is both rival and excludable, meaning its use is limited to the payer and excludes others.

Public Good

A good that is both non-rival and non-excludable, such as street lighting or national defense.

Non-rival

A characteristic where one student's use of a good, like street lighting, does not reduce the amount of light available for others.

Non-excludable

A characteristic of a good where it is difficult or impossible to stop people from benefiting, such as clean air or a free fireworks show.

Free-rider problem

A market failure where individuals benefit from a service, like national defense, without paying for it, leading to underprovision by private firms.

Tragedy of the commons

A situation where shared resources, such as a public beach or fish stocks, are overused or damaged because individuals respond to personal incentives.

Negative Externality

A situation where the production or consumption of a product imposes a cost on a third party, such as air pollution from a factory.

Positive Externality

A situation where a transaction provides a spillover benefit to society, such as a more skilled workforce resulting from education.

External Cost

A cost paid by a third party who was not involved in the transaction, such as noise from a nearby highway.

External Benefit

A benefit enjoyed by a third party who did not pay for the good, such as the community-wide benefits of clean energy.

Social Cost

The total cost to society, calculated as private cost plus external cost.

Social Benefit

The total benefit to society, calculated as private benefit plus external benefit.

Allocative Efficiency

A market state where Marginal Social Benefit ($MSB$) equals Marginal Social Cost ($MSC$).

Internalizing the Externality

The process of using a tax or policy to make producers or consumers account for the external costs they impose on society.

Subsidy

A government incentive, such as a grant for solar panels, used to increase the production of goods with positive externalities.

Pollution Tax

A fee imposed on producers to raise their costs and reduce the quantity of a good that creates negative externalities.

Third Party

An individual or group affected by the externalities of a market transaction in which they were neither the buyer nor the seller.

Quotas and Permits

Government policies used to protect shared resources by limiting how much of a resource, such as fish, can be legally taken.