Chapter 10 - The Economics of the Public Sector: Externalities and Asymmetric Information

Protective Function of Government

an infrastructure of rules within which people can interact peacefully with one another

Productive Function of Government

government sometimes produces products that private markets do not produce at efficient levels

Government Corrections for Market Failures

policy measures implemented to address inefficiencies that arise when a free market fails to allocate resources optimally

Externalities

Third party affected by market transaction. The uncompensated impact of one person’s actions on the well-being of a bystander

External Benefits

when a third party benefits from a market transaction in which they take no part

External Costs

when a third party bears a cost from a market transaction in which they take no part

Social Cost

the total cost to society of producing or consuming a good or service, including both the private costs (borne by the producer or consumer) and the external costs imposed on third parties

Private Cost

the cost incurred by an individual or firm directly involved in an economic transaction

Social Benefit

the total benefit to society from an economic activity, including both the private benefits received by the individuals directly involved in the transaction and any external benefits that affect third parties

Private Benefit

the gain or advantage received by an individual or firm directly involved in an economic activity, such as a transaction

Internalizing the Externality

altering incentives so that people take account of the external effects of their actions

Command and Control Policies

policies that rely on regulation (permission, prohibition, standard setting, enforcement, and property right protection)

Corrective Tax

Increasing the price of something will decrease the quantity. An attempt to mitigate the bad effects of a negative externality through tax.

Corrective Subsidy

Decreasing the price of something will increase the quantity demanded. Offered to producers or consumers of a beneficial product.

Pigouvian COVID Vaccine Subsidy

a government financial incentive designed to encourage the public to get vaccinated by internalizing the positive externalities (societal benefits) associated with vaccination

Special Interest Effect

refers to the phenomenon where small, organized groups exert significant influence on policy decisions, often leading to outcomes that favor their interests over the general public's welfare

Efficient Scale of Provision

the level of output at which the total cost of production is minimized, ensuring that resources are utilized in a way that maximizes societal welfare while minimizing waste

Socially Optimal Output Levels

the quantities of goods produced that equalize the marginal social cost and marginal social benefit, ensuring that the overall welfare of society is maximized

Technology Spillover

occurs when the research and development efforts of one firm benefit other firms, leading to positive externalities that enhance overall technological progress in the industry

Patent Protection

a legal mechanism that grants inventors exclusive rights to their inventions for a certain period, incentivizing innovation by allowing them to capture economic benefits from their creations

Arthur Pigou

an economist known for his work on externalities, particularly advocating for the use of corrective taxes to address negative externalities and align private incentives with social costs

The EPA

a U.S. government agency responsible for enforcing regulations that protect the environment and public health by managing pollution and ensuring compliance with environmental laws

Coase’s Theorem

posits that if property rights are well-defined and transaction costs are low, parties can negotiate solutions to externalities effectively, leading to efficient outcomes regardless of who holds the right

Transaction Costs

the expenses incurred during the process of buying or selling goods and services, including costs associated with negotiating and enforcing contracts, which can hinder efficient market transaction

Lack of Information/Asymmetric Information

refers to situations where one party in a transaction has more or better information than the other, leading to inefficiencies and potential market failures, such as adverse selection

The FDA

a U.S. government agency that ensures the safety and efficacy of food, pharmaceuticals, and medical devices by regulating their development and marketing

The USDA

a government agency that oversees policies related to farming, agriculture, and food, aiming to ensure food safety, nutrition, and the economic viability of rural communities

The Health Department

a governmental body responsible for public health initiatives, monitoring health trends, and ensuring community health standards are met through various programs and regulations

Market-based Policies

policies that increase or decrease the cost of producing or consuming a product with the intent of altering consumption or production to socially desirable levels