Market failure

Common Pool Resources

Resources that are not owned by anyone, non-excludable, and rivalrous; examples include lakes, fishing grounds, and forests.

Tragedy of the Commons

A situation where common pool resources are overused and depleted due to individuals acting in their own self-interest.

Allocative Efficiency

A state of the economy where resources are allocated in a way that maximizes societal benefit, occurring when marginal benefit equals marginal cost.

Marginal private cost (MPC)

The cost to producers of producing one more unit of a good.

Marginal social cost (MSC)

The cost to society of producing one more unit of a good.

Negative Production Externality

External costs created by producers, such as environmental pollution, leading to social costs higher than private costs.

Pigovian Tax

An indirect tax imposed on firms to correct negative externalities by making them internally account for social costs.

Carbon Tax

A tax per unit of carbon emissions aimed at reducing fossil fuel usage by making it more expensive.

Cap-and-Trade

A market-based approach to controlling pollution by providing economic incentives for reducing emissions through trading permits.

Positive Production Externality

External benefits created by producers, such as benefits from research and development that are not captured by the firm.

Public Goods

Goods that are non-excludable and non-rivalrous, leading to market failure in their provision.

Free-rider Problem

A situation where individuals benefit from resources or services without paying for them, leading to under-provision.

Demerit Goods

Goods that are considered undesirable for consumers and are over-consumed, such as cigarettes and alcohol.

Sustainability

The ability to maintain resources for future generations without depleting or degrading them.

Marginal Social Benefit (MSB)

The benefits to society from consuming one more unit of a good.

Welfare Loss

A loss of social benefits due to overproduction or underproduction of a good caused by externalities.

Collective Self-Governance

A method by which local communities manage common pool resources sustainably through communication and self-created rules.

Rivalrous

One person’s use reduces the availability of others

Non-excludable

Once the good is provided, it's available for everyone to consume, regardless of whether they've contributed to its provision

Negative production externality

overproduction; possible policies: legislation & regulation, indirect tax, education, international agreement, subsidy, tradable permits

Negative consumption externality

overconsumption; possible policies: legislation & regulation, indirect tax, education

Positive production externality

underproduction; possible policies: subsidy, direct provision

Positive consumption externality

underconsumption; possible policies: direct provision, legislation & regulation

Direct provision

When the government produces the good or service itself