Coase Theorem and Externalities

Coase Theorem

Private parties can solve externalities without government intervention.

Free-Rider Problem

People benefit from public goods without paying, so the government provides them.

Gini Coefficient

Measure of income inequality ranging from 0 to 1.

Lorenz Curve

Curve showing how much of a country's total income is earned by households.

Lump-Sum Tax

Fixed tax on producers regardless of the amount produced.

Marginal Social Benefit (MSB)

Benefits to society when consuming a product.

Marginal Social Cost (MSC)

Costs incurred to society when an additional unit is produced.

Negative Externality

Third party incurs cost of producing a product, causing market to produce too much.

Per-Unit Subsidy

Payment to producers from government for each additional unit produced.

Per-Unit Tax

Tax on producers for each additional unit produced, adding to marginal cost.

Positive Externality

Production or consumption of a good that creates benefits for third parties.

Private Goods

Exclusive and rival goods in consumption.

Progressive Tax

Tax with higher rates as income increases.

Proportional Tax

Tax with consistent rates for everyone regardless of income.

Public Goods

Nonexclusive and nonrival goods, like national defense.

Regressive Tax

Tax where burden falls as income rises.

MSB = MSC

Allocatively Efficient Quantity considering externalities.

Positive Externality Formula

MPB + MEB = MSB

Negative Externality Formula

MPC + MEC = MSC