Externalities and Public Goods

These flashcards cover key vocabulary and concepts associated with externalities and public goods in microeconomics.

Externality

A cost or benefit that affects a party not directly involved in a transaction.

Negative externality

A cost imposed on a party not directly involved in a transaction, such as air pollution from coal-fired power plants.

Positive externality

A benefit conferred on a party not directly involved in a transaction, such as pollination by a beekeeper's bees.

Social cost

The total cost of a transaction to society, equal to the private cost plus the external cost.

Social benefit

The total benefit of a transaction to society, equal to the private benefit plus the external benefit.

Marginal social cost (MSC)

The total cost to society of producing one additional unit of a good, including both private costs and external costs.

Marginal benefit of pollution (MBP)

The benefit derived from producing one more unit of pollution, often linked to increased production and lower market prices.

Pigouvian tax

A tax on an activity that raises a good’s price to take into account the external marginal costs imposed by a negative externality.

Public goods

Goods that are nonexcludable and nonrival, such as national defense or clean air.

Free-rider problem

A source of inefficiency resulting from individuals consuming a public good or service without paying for it.

Tragedy of the commons

The situation that arises when common resources are overused because individuals have free access to them.

Tradable permits

Government-issued permits that allow a firm to emit a certain amount of pollution, which can be traded to other firms.

Coase theorem

States that if negotiation costs are low enough, negotiation among market participants will lead to the efficient market outcome regardless of who holds legal property rights.