Chapter 10: Externalities and Public Goods

Flashcards covering key concepts related to externalities and public goods as discussed in Chapter 10.

Externality

A side effect of an activity that affects bystanders whose interests are not taken into account.

Negative Externality

A side effect that harms bystanders, imposing costs on others.

Positive Externality

A side effect that benefits bystanders, generating benefits for others.

Market Failure

Inefficient outcomes that are not in society’s best interest, often due to externalities.

Free-Rider Problem

When someone can enjoy benefits of a good without bearing the costs because the good is nonexcludable.

Tragedy of the Commons

The tendency to overconsume a common resource, leading to depletion.

Marginal Private Cost (MPC)

The extra costs paid by the seller from producing one extra unit.

Marginal External Cost (MEC)

The extra cost imposed on bystanders from producing one extra unit.

Marginal Social Cost (MSC)

All marginal costs, no matter who pays them; MSC = MPC + MEC.

Corrective Tax

A tax designed to induce people to take account of the negative externalities they cause.

Corrective Subsidy

A subsidy designed to induce people to take account of the positive externalities they cause.

Cap and Trade

A system that allows firms to buy and sell permits to pollute, controlling total pollution levels.

Private Bargaining

A solution to externality problems where affected parties negotiate amongst themselves.

Government Support for Public Goods

When the government provides public goods directly or purchases them to overcome underproduction.

Nonexcludable Good

A good that someone cannot easily be excluded from using.

Rival Good

A good where one person's use reduces availability for others.

Nonrival Good

A good where one person's use does not reduce availability for others.