Econ: Positive and Negative Externalities & Market Structures

free rider

those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided

intellectual property

the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions

nonexcludable

when it is costly or impossible to exclude someone from using the good, and thus hard to charge for it

nonrivalrous

even when one person uses the good, others can also use it

positive externalities

beneficial spillovers to a third party or parties

private benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company

private rates of return

when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account

public good

good that is nonexcludable and nonrivalrous, and thus is difficult for market producers to sell to
individual consumers

social benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and by society as a whole

social rate of return

when the estimated rates of return go primarily to society; for example, providing free education

additional external cost

additional costs incurred by third parties outside the production process when a unit of output is produced

command-and-control regulation

laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used

externality

a market exchange that affects a third party who is outside or "external" to the exchange; sometimes called a "spillover"

international externalities

externalities that cross national borders and that a single nation acting alone cannot resolve

market failure

When the market on its own does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure

marketable permit program

a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms

negative externality

a situation where a third party, outside the transaction, suffers from a market transaction by others

pollution charge

a tax imposed on the quantity of pollution that a firm emits; also called a pollution tax

positive externality

a situation where a third party, outside the transaction, benefits from a market transaction by others

social costs

costs that include both private costs incurred by firms and also additional costs incurred by third parties outside the production process, like costs of pollution

spillover

aka externality

Perfect competition

A market structure that has:
1. a large number of businesses
2. all produce the same product (Commodity)
3. a large number of consumers
4. all are knowledgeable about the product
5. all are free to enter into or leave the business

Identical Products

A product that is the same no matter who produces it, such as petroleum, notebook paper, or milk.

Imperfect competition

a market structure that is missing at least one of the pieces of perfect competition.

Monopoly

A market dominated by a single seller

Natural monopoly

A market that runs most efficiently when one large firm supplies all of the output.
Ex: One electric power plant for a city. One sewage collection department for a city.

Patent

1. A license that gives the inventor of a new product the exclusive right to sell it for a certain period of time.
2. This creates a Technological Monopoly.

Monopolistic competition

A market structure in which many companies sell products that are similar but not identical.

Product Differentiation

The basis of monopolistic competition.
Making a product different from other similar products.

Non price competition

A way to attract customers through style, service, or advertising without changing the price.

Oligopoly

A market structure in which a few large firms dominate a market.

Collusion

An agreement among businesses to divide the market, set prices, or limit production. These practices are illegal.

market

a group of buyers and sellers of a particular good or service

product market

the market in which households purchase the goods and services that firms produce

factor market

market in which firms purchase the factors of production

circular flow of economic activity

economic model that pictures income as flowing continuously between businesses and consumers

Oligopoly example

There are only 3 real choices in cell phone providers - AT&T, Verizon and Sprint/T Mobile. All other providers pay to use their towers.

Example of non-price competition

Ex: McDonald's is known for the Big Mac; Amazon will deliver all goods to your home

Example of Product differentiation

Ex: Starbucks makes coffee, but adds flavors to differentiate theirs from other coffee makers.

Example of Monopolistic competition

Ex: Even though Marvel movies vs DC movies have similar characters, the characters aren't exactly the same.