Microeconomics Externalities and Private Goods Definitions

Terms concerning externalities, bargaining, and private goods

Externality

Term for when someone outside of a transaction is affected in a positive or negative way

Marginal Private Benefit

Buyers valuation on the Demand curve

Marginal Private Cost

Sellers cost on the Supply curve

Marginal Social Benefit

Sum of benefits to all parties (including Externalities)

Marginal Social Cost

Sum of all costs to all parties (including Externalities)

Positive (good) Externality

The Marginal Social Benefit > Marginal Private Benefit AND/OR Marginal Social Cost < Marginal Private Cost

Negative (bad) Externality

The Marginal Social Benefit < Marginal Private Benefit AND/OR Marginal Social Cost > Marginal Private Cost

Profit Maximizing Quantity (Q*)

Intersection of Marginal Private Cost (MPC) and Marginal Private Benefit (MPB)

Socially Optimum Quantity (Q social)

Intersection of Marginal Social Cost (MSC) and Marginal Social Benefit (MSB)

Tax

Enacted when Q* is greater than Q social

Subsidy

Enacted when Q* is less than Q social

Social Optimum

When profits are maximized (bargaining can always be used to reach social optimum)

Private Good

A good that is rival and excludable (ex: Starbursts)

Common Resource

A good that is rival and non-excludable (ex: roads)

Club Good

A good that is non-rival and excludable (ex: pay TV)

Public Good

A good that is non-rival and non-excludable (ex: knowledge); large incentive to free-ride

Tragedy of Commons

When rival, non-excludable (common resource) goods are massively overused