chapter 10: externalities and public goods

Cap and trade

quantity regulation implemented by allocating a fixed number of permits which can then be traded

Club good

excludable, non-rival

Coase theorem

if bargaining is costless and property rights are clearly established and enforced, externality problems can be solved through private bargaining

Common resources

nonexcludable, rival

Corrective subsidy

induce people to take account of positive externalities

Corrective tax

induces people to take account of negative externalities

External benefit

benefit that positive externalities create for by standers

External cost

harm that negative externalities create for bystanders

Externality

a side effect of an activity that affects bystanders whose interests are not taken into account, lead to market failure

Free-rider problem

when someone can enjoy the benefits of a good without bearing the costs

Marginal external cost

the extra costs imposed on bystanders from producing one extra unit

Marginal external benefit

the extra external benefit accruing to bystanders from one extra unit

Marginal private cost

the extra cost paid by the seller from producing one extra unit

Marginal private benefit

the extra benefit enjoyed by the buyer from one extra unit

Marginal social cost

all marginal costs, no matter who pays them,

Marginal social benefit

all marginal benefits, no matter who gets them,

Negative externality

imposed cost on others

Nonexcludable

when someone cannot be easily excluded from ousing something

Nonrival

a good for which one person’s use doesnt subtract from another’s

Positive externalities

generate benefits for others

Public good

non rival, nonexcludable

Private good

rival, excludable

Rational rule for society

produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost

Rival

a good for which your use of it comes at someone else’s expese

Socially optimal outcome

the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

Tragedy of the commons

overconsumption of common resources

solutions of common resources

restrict access

solutions for public goods

govt provisions, social pressure, privatization, contracts

other solutions to externalities

cap and trade, private bargaining, laws/rules/regulations, govt support for public goods, ownership rights for common resources