Microeconomics: Externalities and Public Goods — Vocabulary Flashcards

Vocabulary cards covering externalities, private and government solutions, and public goods from Chapter 9 notes.

Externality

An economic activity that has spillover costs or benefits to bystanders.

Negative externality

A negative spillover effect from an economic activity.

Positive externality

A positive spillover effect from an economic activity.

Pecuniary externality

An externality that occurs when a market exchange affects others through market prices.

Socially optimal quantity and price

The level of output and price that maximize social welfare by incorporating externalities.

Internalize the externality

Make private incentives reflect social costs or benefits.

Coase Theorem

Private bargaining can lead to an efficient allocation when transaction costs are low and property rights are well defined; government intervention is not necessary.

Private solutions to externalities

Bargaining among affected parties to solve externalities.

Transaction costs

Costs associated with negotiating and enforcing a private agreement.

Property rights

Legal rights defining who can use or transfer resources; clarity matters for bargaining.

Government solutions to externalities

Government actions to address externalities, either via command-and-control or market-based policies.

Command-and-control policies

Direct government regulation of resource allocation or emissions.

Market-based policies

Government incentives to internalize externalities, e.g., taxes or subsidies.

Pigouvian tax

A tax on a negative externality to push output to the social optimum.

Pigouvian subsidy

A subsidy on a positive externality to increase consumption toward the social optimum.

Pay-as-You-Throw

A policy that charges for waste disposal to reduce negative externalities from trash.

Free rider problem

When individuals benefit from a public good without paying for it.

Public goods

Goods that are non-excludable and non-rival; many can use them without reducing others’ consumption.

Non-excludable

A good that people cannot be effectively excluded from using.

Non-rival

A good whose consumption by one person does not reduce another’s ability to consume.

Rival good

A good whose consumption by one person reduces availability for others.

Excludable

A good that can be restricted to paying customers.

Club goods

Excludable but non-rival goods such as cable TV or Wi-Fi.

Common pool resource goods

Low excludability and high rivalry; prone to open access and depletion.

Tragedy of the commons

Overuse of a common pool resource due to open access.

Private ownership

Ownership by individuals or entities that can help solve tragedy of the commons through control.

Tax on use

A government levy to limit usage of a resource to reduce negative externalities.

Social benefits of education

Benefits to society from education such as higher wages, tax revenues, less crime, more innovation, and a better functioning society.