Econ 115 Quiz III: Externalities, Public Goods, and Costs of Production

Vocabulary practice flashcards covering externalities, public goods, common resources, and short-run production costs from Dr. Postolache's Economics 115 Quiz III review material.

Negative Externality

An adverse effect imposed on a bystander who is not compensated by the person or firm causing the effect. Because the market supply curve reflects only private costs and not external costs, the free market produces a quantity greater than the socially optimal level at a price that is too low.

Positive Externality

A beneficial effect enjoyed by a bystander who does not pay the person or firm causing the effect. Because the market demand curve reflects only private value and not external benefits, the free market produces a quantity lower than the socially optimal level.

Social Cost

The full cost to society of producing a good, calculated as the sum of private production cost and external cost ($\text{Social Cost} = \text{Private Cost} + \text{External Cost}$). In the presence of a negative externality, the social cost exceeds the private cost.

Social Value

The full value to society of consuming a good, calculated as the sum of private value and external benefit ($\text{Social Value} = \text{Private Value} + \text{External Benefit}$). In the presence of a positive externality, social value exceeds private value.

Corrective Tax (Pigouvian Tax)

A tax placed on output to internalize a negative externality. To shift the market supply curve precisely to the socially optimal equilibrium, the tax per unit must equal the size of the external cost.

Excludability

The property of a good whereby individuals can be prevented or blocked from using or consuming it.

Rivalry in Consumption

The property of a good whereby one person's consumption or use of the good diminishes another person's ability to consume or use it.

Private Good

A good that is both excludable and rival in consumption (e.g., a slice of pizza, a home, or a congested toll road).

Public Good

A good that is neither excludable nor rival in consumption (e.g., national defense, knowledge, a tornado siren, or an uncongested nontoll park).

Common Resource

A good that is rival in consumption but nonexcludable (e.g., fish in the ocean, roaming African elephants, wild tigers, or a free public park with crowded picnic tables).

Club Good

A good that is excludable but nonrival in consumption (e.g., cable TV service or an uncongested toll road).

Free Rider

A person who receives the benefit of a good but avoids paying for it.

Free-Rider Problem

A market failure occurring because public goods are nonexcludable, enabling people to consume them without paying and leading private markets to undersupply the socially optimal quantity.

Total Revenue ($TR$)

The total amount of money a firm receives from selling its output, calculated as price multiplied by quantity ($TR = P \times Q$).

Explicit Costs

Production costs that require a direct monetary outlay of cash by the firm (e.g., paying for wages, supplies, and materials).

Implicit Costs

Opportunity costs that do not require a direct outlay of cash by the firm, representing forgone earnings or opportunities (e.g., the salary an owner gave up to start a business).

Accounting Profit

The monetary surplus of total revenue over explicit costs ($\text{Accounting Profit} = TR - \text{Explicit Costs}$).

Economic Profit

The surplus of total revenue over total opportunity costs, taking into account both explicit and implicit costs ($\text{Economic Profit} = TR - (\text{Explicit Costs} + \text{Implicit Costs})$).

Marginal Product ($MP$)

The increase in total output produced by adding one additional unit of an input, such as hiring one more worker ($MP = \frac{\Delta Q}{\Delta L}$).

Diminishing Marginal Product

The economic property whereby the marginal product of an input begins to decline as the quantity of that input successively increases.

Fixed Costs ($FC$)

Costs that do not vary with the quantity of output produced and must be paid even if output is zero.

Variable Costs ($VC$)

Costs that change as the quantity of output produced changes ($VC = TC - FC$).

Average Fixed Cost ($AFC$)

Total fixed cost divided by the quantity of output produced ($AFC = \frac{FC}{Q}$).

Average Variable Cost ($AVC$)

Total variable cost divided by the quantity of output produced ($AVC = \frac{VC}{Q}$).

Average Total Cost ($ATC$)

Total cost divided by the quantity of output produced, which also equals average fixed cost plus average variable cost ($ATC = \frac{TC}{Q} = AFC + AVC$).

Marginal Cost ($MC$)

The additional cost incurred by producing one additional unit of output, calculated as the change in total cost divided by the change in quantity ($MC = \frac{\Delta TC}{\Delta Q}$).