Chapter 11: Public Goods, Externalities, and the Role of Government

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