Module 13: Externalities, Public Goods, Common Resources

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

Private cost

the cost paid by the producer of a good or service

Social cost

the cost of producing the good or service, including both the private cost and the external cost

Externalities can be

• Positive: extra benefit

• Negative: extra cost

Private benefit

the benefit received by the consumer of a good or service

Social benefit

the total benefit from consuming the good or service, including both the private benefit and the external benefit

Market failure

A situation where the market fails to produce the efficient level of output

Negative externalities result in…

overproduction

Positive externalities result in…

underproduction

Externalities are the result of

• incomplete property rights

• difficulty enforcing property rights

Coase theorem

the idea that private parties can solve the problem of externalities. It requires

• identifiable and enforceable property rights

• low transaction costs

Pigouvian Taxes and Subsidies

taxes and subsidies that are used to correct externalities

• increase efficiency

• bring in tax revenue

Market-Based

• taxes

• subsidies

Command-and-Control

• government imposed quantity limits on production

• ex: tradable emissions allowances

Rival

one person's consumption means someone else cannot consume the good

Excludable

 a person who does not pay cannot consume the good

Public goods

are nonrival and nonexcludable

Free riders

people can benefit from a good without paying for it

Private Goods

Excludable, Rival

Common Resources

Non-Excludable, Rival, tend to be overconsumed

Quasi-Public Goods

Non-Rival, Excludable

Public Goods

Non-Excludable, Non-Rival