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Private goods
Goods that are both rival and excludable. Only one person can consume the good at a time, and consumers who do not pay for the good are excluded from consumption. Examples include a tube of toothpaste or an airline ticket.
Public goods
Goods that are both nonrival and nonexcludable. One person’s consumption does not prevent another from also consuming the good, and if it is provided to some, it is necessarily provided to all, even if they do not pay for the good. Examples are local police services and national defense
Free-rider problem
In the case of a public good, some members of the community know that they can consume the public good while others provide for it. This results in a lack of private funding for the good and requires that the government provide it.
Spillover benefits
Additional benefits to society, not captured by the market demand curve from the production of a good, result in a price that is too high and a market quantity that is too low. Resources are underallocated to the production of this good
Positive externality
Exists when the production of a good creates utility (the spillover benefits) for third parties not directly involved in the consumption or production of the good
Marginal private benefit curve (MPB)
The MPB reflects the additional benefit received by actual consumers of a good; the market demand curve
Marginal social benefit curve (MSB)
The MSB reflects the additional benefit received by all members of society, including both those who actually consume the good and those who receive spillover benefits from that consumption; the socially optimal demand curve
Spillover costs
Additional costs to society, not captured by the market supply curve from the production of a good, result in a price that is too low and market quantity that is too high. Resources are overallocated to the production of this good
Negative externality
Exists when the production of a good imposes disutility (the spillover costs) upon third parties not directly involved in the consumption or production of the good
Marginal private cost curve (MPC)
The MPC reflects the additional cost incurred by actual producers of a good; the market supply curve
Marginal social cost curve (MSC)
The MSC reflects the additional cost incurred by all members of society, including those who actually produce the good and those who incur spillover costs from that production; the socially optimal supply curve
Egalitarianism
The philosophy that all citizens should receive an equal share of the economic resources
Marginal productivity theory
The philosophy that a citizen should receive a share of economic resources proportional to the marginal revenue product of his or her productivity
Marginal tax rate
The rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes divided by the change in income
Average tax rate
The proportion of total income paid to taxes. It is calculated by dividing the total taxes owed by the total taxable income
Progressive tax
The proportion of income paid in taxes rises as income rises. An example is the personal income tax
Tax bracket
A range of income on which a given marginal tax rate is applied
Regressive tax
The proportion of income paid in taxes decreases as income rises. An example is a sales tax
Proportional tax
A constant proportion of income is paid in taxes no matter the level of income. An example is a “flat tax” or the corporate income tax
Lorenz curve
A graphical representation of a nation’s income distribution
Gini ratio
A measure of a nation’s income inequality. This measure uses a scale between zero and one. The closer it lies to zero, the more equal the distribution of income
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