Lecture_12

Externality

A cost or benefit affecting a party not directly involved in a transaction.

Negative externality

A cost imposed on a party not directly involved in a transaction.

Positive externality

A benefit conferred on a party not directly involved in a transaction.

Social cost

The cost of a transaction to society, equal to the private cost plus the external cost.

Social benefit

The benefit of a transaction to society, equal to the private benefit plus the external benefit.

External marginal cost (EMC)

The cost imposed on a third party when an additional unit of a good is produced or consumed.

External marginal benefit (EMB)

The benefit conferred on a third party when an additional unit of a good is produced or consumed.

Market failure

A situation in which the allocation of goods and services is not efficient.

Coase Theorem

If negotiation costs are low enough, negotiation among market participants will lead to the efficient market outcome regardless of legal property rights.

Public good

A good that benefits the individual consumer, even as others consume it, and is accessible to anyone.

Nonexcludable good

A good that consumers cannot be prevented from consuming.

Nonrival good

A good where one person’s consumption does not diminish another individual's enjoyment of the same good.

Free-rider problem

A source of inefficiency resulting from individuals consuming a public good or service without paying for it.

Pigouvian tax

A tax designed to correct market failures and improve societal welfare by accounting for external marginal costs.

Pigouvian subsidy

A subsidy intended to equate the external marginal benefit imposed by a positive externality.

Quota

A regulation that mandates limiting the production or consumption of a certain quantity of a good.

Tragedy of the commons

A dilemma arising from common resources being overused due to nonexcludability.

Marginal social benefit (MSB)

The additional benefit to society from the production or consumption of one more unit of a good.

Marginal cost of pollution (MCP)

The cost associated with the damage from producing one more unit of pollution.

Socially optimal quantity

The quantity of production that maximizes social welfare by equating social costs and benefits.