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Externality
A side effect of a decision that affects bystanders whose interests aren't taken into account.
Negative Externality
A side effect of an activity that imposes costs on others, e.g., pollution from a car.
Positive Externality
A side effect of an activity that benefits others, e.g., vaccination reducing the spread of illness.
Marginal Private Cost
The cost incurred by a producer for one additional unit of output.
Marginal External Cost
The cost imposed on bystanders from producing one more unit of a good.
Marginal Social Cost
The sum of marginal private costs and marginal external costs.
Marginal Benefit
The additional benefit derived from consuming one more unit of a good.
Socially Optimal Quantity
The quantity that results in the highest total economic benefit, taking into account all externalities.
Coase Theorem
States that if property rights are clear and transaction costs are low, externality problems can be solved through private bargaining.
Corrective Tax
A tax imposed on activities that create negative externalities, aimed at reducing their occurrence.
Subsidy
A financial aid provided by the government to encourage activities that result in positive externalities.
Cap and Trade
A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
Public Good
A good that is nonrivalrous and nonexcludable, leading to free-rider problems.
Tragedy of the Commons
A situation where individuals overuse a common resource, leading to its depletion.
Free-Rider Problem
When individuals benefit from resources they do not pay for, often leading to underproduction of goods.
Marginal Social Benefit
The total benefit to society from consuming one more unit of a good, which includes both private and external benefits.
Private Bargaining
Negotiation between parties affected by an externality to reach an agreeable outcome without government intervention.
Ownership Rights
Legal rights to control and use a resource, which can help manage common resource issues.
Social Sanctions
Societal pressures or consequences that discourage individuals from engaging in behaviors that impose external costs.
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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