ECON_10

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20 Terms

1

Externality

A side effect of a decision that affects bystanders whose interests aren't taken into account.

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2

Negative Externality

A side effect of an activity that imposes costs on others, e.g., pollution from a car.

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3

Positive Externality

A side effect of an activity that benefits others, e.g., vaccination reducing the spread of illness.

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4

Marginal Private Cost

The cost incurred by a producer for one additional unit of output.

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5

Marginal External Cost

The cost imposed on bystanders from producing one more unit of a good.

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6

Marginal Social Cost

The sum of marginal private costs and marginal external costs.

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7

Marginal Benefit

The additional benefit derived from consuming one more unit of a good.

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8

Socially Optimal Quantity

The quantity that results in the highest total economic benefit, taking into account all externalities.

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9

Coase Theorem

States that if property rights are clear and transaction costs are low, externality problems can be solved through private bargaining.

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10

Corrective Tax

A tax imposed on activities that create negative externalities, aimed at reducing their occurrence.

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11

Subsidy

A financial aid provided by the government to encourage activities that result in positive externalities.

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12

Cap and Trade

A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

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13

Public Good

A good that is nonrivalrous and nonexcludable, leading to free-rider problems.

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14

Tragedy of the Commons

A situation where individuals overuse a common resource, leading to its depletion.

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15

Free-Rider Problem

When individuals benefit from resources they do not pay for, often leading to underproduction of goods.

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16

Marginal Social Benefit

The total benefit to society from consuming one more unit of a good, which includes both private and external benefits.

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17

Private Bargaining

Negotiation between parties affected by an externality to reach an agreeable outcome without government intervention.

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18

Ownership Rights

Legal rights to control and use a resource, which can help manage common resource issues.

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19

Social Sanctions

Societal pressures or consequences that discourage individuals from engaging in behaviors that impose external costs.

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20

Internalizing the Externality

Adjusting decisions to take into account both private costs or benefits and the external costs or benefits of a choice.

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