Externalities and Public Goods: Chapter 10 Overview

Externality

A side effect affecting bystanders' interests.

Negative Externality

A side effect that harms bystanders.

Positive Externality

A side effect that benefits bystanders.

Market Failure

Inefficient outcomes not in society's best interest.

Greenhouse Gas Emissions

Pollutants causing climate change from fossil fuels.

Fossil Fuels

Natural substances used for energy, causing pollution.

Traffic Congestion

Increased road usage leading to slower travel times.

Pollution

Contamination affecting health and environment negatively.

Bystander

An individual affected by externalities without decision power.

Cost-Benefit Principle

Evaluating choices based on associated costs and benefits.

Covid Vaccine

A positive externality reducing illness spread in community.

Social Interest

The collective well-being of society as a whole.

Private Interest

Individual benefits prioritized over societal consequences.

Exercise Benefits

Health improvements from regular physical activity.

Study Group Preparation

Sharing insights that enhance group learning outcomes.

Flower Garden

Aesthetic improvement benefiting neighbors' environment.

Secondhand Smoke

Health risks imposed on others by smokers.

Parking Space Conflict

Disruption caused by improper parking behavior.

Instagram Distraction

Reduced learning due to social media during class.

Decision-Making Process

Evaluating options while considering external effects.

Short-Term Side Effects

Immediate negative impacts from vaccinations or treatments.

Community Health

Overall wellness of a population influenced by choices.

Bystander Interests

Concerns of individuals not involved in decision-making.

Private Interest

Costs and benefits incurred personally by an individual.

Social Interest

Costs and benefits affecting society as a whole.

Externality

A side effect impacting bystanders from economic activities.

Market Failure

Inefficiency in resource allocation due to externalities.

Marginal Private Cost (MPC)

Extra costs incurred by sellers for one additional unit.

Marginal External Cost (MEC)

Costs imposed on bystanders from producing an extra unit.

Marginal Social Cost (MSC)

Total costs including both private and external costs.

Marginal Private Benefit (MPB)

Extra enjoyment gained by buyers from one additional unit.

Marginal External Benefit (MEB)

Benefits received by bystanders from one additional unit.

Marginal Social Benefit (MSB)

Total benefits including both private and external benefits.

Negative Externality

Harmful side effects affecting others from production.

Positive Externality

Beneficial side effects impacting others from production.

Supply Curve

Graph showing relationship between price and quantity supplied.

Demand Curve

Graph showing relationship between price and quantity demanded.

Gas Example

Illustrates costs related to gas production and pollution.

Vaccine Example

Illustrates benefits of vaccination for individuals and society.

Marginal Social Costs Formula

MSC = MPC + MEC.

Marginal Social Benefits Formula

MSB = MPB + MEB.

Market Failure (Negative)

Too much activity occurs when MSC > MPC.

Market Failure (Positive)

Too little activity occurs when MSB > MPB.

Wedge Effect

Discrepancy between private and social interests.

Bystanders

Individuals affected by others' economic choices.

Socially optimal quantity

Most efficient quantity for society overall.

Negative externalities

Overproduction harms bystanders and society.

Positive externalities

Underproduction benefits society but is neglected.

Externality problem

Market ignores bystanders' interests, causing inefficiency.

Marginal principle

Evaluate if one more unit benefits society.

Cost-benefit principle

Compare marginal social benefit and cost.

Rational rule for society

Produce more if marginal benefit equals cost.

Equilibrium quantity

Supply equals demand in the market.

Marginal social cost

Total cost to society for producing one more unit.

Marginal external cost

Cost imposed on bystanders per unit produced.

Four-step recipe

Method to analyze externalities and outcomes.

Step 1: Predict equilibrium

Forecast quantity where supply meets demand.

Step 2: Assess externalities

Determine if externality is positive or negative.

Step 3: Find socially optimal quantity

Where marginal social benefit equals marginal social cost.

Step 4: Compare quantities

Identify overproduction or underproduction relative to optimal.

Market failure

Inefficient market outcome due to externalities.

Gasoline externality example

Gas production harms others, causing negative externality.

Marginal social benefit

Benefit to society from consuming one more unit.

Bystanders

Individuals affected by market outcomes but not participants.

Tragedy of the Commons

Overuse of shared resources leads to depletion.

Public goods

Non-excludable and non-rivalrous resources for society.

Pollution optimal level

Some pollution is acceptable for societal efficiency.

Demand curve

Reflects marginal private benefit for consumers.

Supply curve

Reflects marginal private cost for producers.

Marginal social cost

Cost incurred by society for production.

Marginal private cost

Cost borne by producers for supply.

Overproduction

Production exceeding socially optimal levels.

Marginal social benefit

Total benefit to society from consumption.

Equilibrium quantity

Quantity where supply equals demand.

Socially optimal quantity

Quantity maximizing overall societal welfare.

Socially Optimal Quantity of Pollution

Balance between pollution costs and benefits.

Positive externalities

Benefits enjoyed by third parties from consumption.

Marginal external benefit

Additional benefit to society from an action.

Marginal private benefit

Benefit received by consumers from consumption.

Market failure

Inefficient allocation of resources in the market.

Underproduction

Production below the socially optimal level.

Coase Theorem

Private bargaining solves externality problems if costless.

Corrective taxes

Taxes aimed at reducing negative externalities.

Subsidies

Financial aid to encourage positive externalities.

Cap and trade

Market-based approach to control pollution.

Public goods

Non-excludable and non-rivalrous resources.

Tragedy of the Commons

Overuse of shared resources leading to depletion.

Private bargaining

Negotiation between parties to resolve externalities.

Laws and regulations

Government interventions to manage externalities.

Ownership rights

Legal entitlements to resources affecting externalities.

Bystanders

Individuals affected by externalities but not involved.

Negative Externality

Cost imposed on third parties by an activity.

Positive Externality

Benefit received by third parties from an activity.

Side Payments

Compensation to alter another's behavior or decision.

Loud Music Example

Neighbor's music causing disturbance; resolved via payment.

Humana Health Insurance

Insurance incentivizing exercise to reduce medical costs.

Go365 Program

Humana's initiative rewarding clients for exercising.

Climate Change Bargaining

Difficulty in collective negotiation among affected parties.

Corrective Taxes

Taxes aimed at internalizing negative externalities.

Corrective Subsidies

Subsidies aimed at promoting positive externalities.