Key Economic Concepts on Externalities

Flashcards covering key economic concepts related to externalities and their implications.

Externality

A side effect on bystanders whose interests haven't fully been taken into account.

Negative Externality

A negative side effect on bystanders.

Positive Externality

Side effects that benefit bystanders.

Marginal Private Cost

The extra cost that the seller incurs to produce one more unit.

Marginal External Cost

The extra cost imposed on bystanders from producing one more unit.

Marginal Social Cost

The sum of the marginal private costs paid by the seller and the marginal external costs.

Marginal Private Benefit

The extra benefits that accrue to buyers guiding their decisions.

Marginal External Benefit

The extra benefits enjoyed by bystanders.

Marginal Social Benefit

The sum of the marginal benefit accruing to the buyer and the marginal external benefit that accrues to bystanders.

Socially Optimal Quantity

The quantity that is most efficient for society as a whole, taking account of all costs and all benefits.

Marginal Principle

Will society be better off if it produces one more of a product?

Coase Theorem

If people can bargain costlessly and legal rights are clear and enforced, then externality problems can be solved by private bargaining.

Corrective Tax

Taxes that induce people to take account of the negative externalities they create.

Corrective Subsidy

Subsidies that can lead people to consider the positive externalities their actions generate.

Cap and Trade

Government regulates the quantity of negative externalities directly through pollution permits.

Free-Rider Problem

Occurs when someone can enjoy the benefits of something without bearing the costs.

Rival Good

A good where one person's use comes at someone else's expense.

Public Good

A non-rival good that is non-excludable and hence subject to the free rider problem.

Club Good

A good that is excludable but non-rival.

Common Resources

Goods that are rival but non-excludable.

Private Good

A good that is perfectly excludable and rival.

Club Good

An excludable but non-rival good, such as Sirius XM.

Common Resource

A good that is perfectly rival and can be overused, such as town commons.

Public Good

A good that is non-excludable and non-rival, like national defense.