Public finance 4,5, 6

pure public good

A commodity that is nonrival and nonexcludable in consumption.

private good

A good that is rival and/ or excludable to some extent.

impure public good

A good that is rival and/ or excludable to some extent.

publicly provided private goods

Rival and excludable commodities that are provided by governments.

horizontal summation

The process of creating a market demand curve by summing the quantities demanded by each individual at every price.

vertical summation

The process of creating an aggregate demand curve for a public good by adding the prices each individual is willing to pay for a given quantity of the good.

free rider

The incentive to let other people pay for a public good while you enjoy the benefits.

perfect price discrimination

When a producer charges each person the maximum he or she is willing to pay for the good.

privatization

The process of turning services that are supplied by the government over to the private sector for provision and/or production.

commodity egalitarianism

The idea that some commodities ought to be made available to everybody.

externality

A cost or benefit that occurs when the activity of one entity directly affects the welfare of another in a way that is outside the market mechanism.

Coase Theorem

Provided that transaction costs are negligible, an efficient solution to an externality problem is achieved as long as someone is assigned property rights, independent of who is assigned those rights.

Pigouvian tax

A tax levied on each unit of an externalitygenerator’s output in an amount equal to the marginal damage at the efficient level of output.

emissions fee

A tax levied on each unit of pollution.

cost effective

A policy that achieves a given outcome at the lowest cost possible.

congestion pricing (emissions fee)

A tax levied on driving equal to the marginal congestion costs imposed on other drivers.

cap-and-trade

A policy of granting permits to pollute, with the number of permits set at the desired pollution level, and allowing polluters to trade the permits.

safety valve price

Within a cap-and-trade system, a price set by government at which polluters can purchase additional permits beyond the cap.

incentive-based regulations

Policies that provide polluters with financial incentives to reduce pollution.

command-and-control regulations

Policies that require a given amount of pollution reduction with limited or no flexibility with respect to how it may be achieved.

technology standard

A type of command-andcontrol regulation that requires firms to use a particular technology to reduce their pollution.

performance standard

A command-and-control regulation that sets an emissions goal for each individual polluter and allows some flexibility in meeting the goal.

hot spots

Localized concentrations of emissions.

political economy

The field that applies economic principles to the analysis of political decision making.

Lindahl prices

The tax share an individual must pay per unit of public good.

majority voting rule

One more than half of the voters must favor a measure for it to be approved.

voting paradox

With majority voting, community preferences can be inconsistent even though each individual’s preferences are consistent.

agenda manipulation

The process of organizing the order in which votes are taken to ensure a favorable outcome.

cycling

When paired majority voting on more than two possibilities goes on indefinitely without a conclusion ever being reached.

peak

A point on the graph of an individual’s preferences at which all the neighboring points have lower utility.

single-peaked preferences

Utility consistently falls as a voter moves away from his or her most preferred outcome.

double-peaked preferences

If, as a voter moves away from his or her most preferred outcome, utility goes down, but then goes back up again.

median voter

The voter whose preferences lie in the middle of the set of all voters’ preferences; half the voters want more of the item selected and half want less.

median voter theorem

As long as all preferences are single peaked and several other conditions are satisfied, the outcome of majority voting reflects the preferences of the median voter.

logrolling (pork barrels)

The trading of votes to obtain passage of a package of legislative proposals.

independence of irrelevant alternatives

Society’s ranking of two different projects depends only on individuals’ rankings of the two projects, not on how individuals rank the two projects relative to other alternatives.

rent-seeking

Using the government to obtain higher than normal returns (“rents”).

cartel

An arrangement under which suppliers band together to restrict output and raise price.

deadweight loss

The pure waste created when the marginal budget of a commodity differs from its marginal cost.