Market Failures in the Environmental Realm

These flashcards cover key concepts related to market failures in the environmental realm, focusing on externalities, public goods, and collective action problems.

What is an externality in economics?

An externality results when the actions of one individual or firm have a direct, unintentional, and uncompensated effect on the well-being of others.

Give an example of a negative externality.

Second-hand smoke or air pollution from factories.

What characterizes public goods?

Public goods are nonrival and nonexcludable, meaning one person's consumption does not diminish availability to others, and individuals cannot be prevented from using them.

What is a common example of a public good?

Clean air.

What are the two conditions for the Tragedy of the Commons to apply?

Open-access and diminishing marginal returns.

What does the term 'free-riding problem' refer to?

It refers to individuals using a public good while relying on others for its provision.

How does diminishing marginal returns affect resource usage?

As the number of people using a resource grows, the benefits increase at a slower rate.

What is a collective action problem?

A situation where a group of individuals would all benefit from contributing to a common good, but each has an incentive to free-ride.

Provide an example of a scenario that illustrates a collective action problem.

The global climate change mitigation efforts, where countries have incentives to shirk responsibility.

What is the relationship between negative externalities and market failure?

Negative externalities often lead to overproduction of harmful goods and contribute to market failure.