Chapter 10: Externalities and Public Goods

These flashcards cover essential vocabulary terms and definitions related to externalities and public goods, based on lecture notes.

Externality

A side effect of an activity that affects bystanders whose interests are not taken into account.

Negative Externality

A side effect that harms bystanders, imposing costs on others.

Positive Externality

A side effect that benefits bystanders, generating benefits for others.

Market Failure

Inefficient outcomes that are not in society’s best interest due to externalities.

Marginal Social Cost

All marginal costs, including both private costs and external costs.

Marginal Private Cost

The extra costs paid by the seller from producing one extra unit.

Corrective Tax

A tax designed to induce people to account for the negative externality they cause.

Coase Theorem

If bargaining is costless and property rights are well defined, private bargaining can solve externality problems.

Free-Rider Problem

When someone can enjoy the benefits of a good without bearing the costs, leading to underproduction.

Tragedy of the Commons

The tendency to overconsume a common resource, leading to depletion.

Cap and Trade

A regulatory system allowing companies to trade pollution permits to limit overall pollution.

Socially Optimal Quantity

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

Public Goods

Goods that are nonexcludable and nonrival, leading to free-rider issues.

Common Resources

Goods that are rival and nonexcludable, leading to overconsumption.