Studied by 6 people
Positive Externalities
Spill over of benefits to third parties that weren’t included in the transaction.
Reason for Failure
Quantity is less in a free market than the socially optimal point.
Free market only considers
private costs and benefits
Negative Externalities
External costs on others that cause the MSC to be greater than the MPC.
Free Rider
A person who uses a collective good without paying for it.
Nonexcludable
Everyone can use the good, even those that don’t pay.
Nonrival
One person’s consumption of a good does not reduce the usefulness to others.
Excludable
Must pay to use.
Rival
Only one person can use it at a time.
Common goods
Nonexcludable, rival
Private goods
Excludable, rival
Public goods
Nonrival, nonexcludable
Coase Theorem
If those who are affected by an externality can negotiate, they may arrive at an efficient solution to the externality problem.
Lorenz Curve
A graph of income inequality that shows what percentage of a country’s income is being earned by a percentage of the country’s households.
The closer the Lorenz curve is to the line of equality…
the more evenly distributed the income
Gini Coefficient
The area between the line of equality and the Lorenz Curve
Unequal
1
Equal
0
The Invisible Hand
Individual self interest leads to economic efficiency.
Market Failures
Externalities, free rider problem, tragedy of the commons, and income inequality.
solution to tragedy of the commons
property rights
Theorem that assumes there are no transaction costs.
Coase
Tragedy of the Commons
Individuals with access to a public resource have no regard to others and deplete the resource.
Note
Flashcard