Market Failures and the Environment: Public Goods and the Tragedy of the Commons

Flashcards covering market failure types, the definitions and properties of public goods, the free rider problem, and the tragedy of the commons.

Market Failure

A situation where the market equilibrium outcome is not socially desirable because it is associated with a deadweight loss.

Externalities

A type of market failure arising when an action has unaccounted for spillover costs or benefits on external parties, misaligning private and social incentives.

Market Power

The ability of individuals or firms to influence the market price through individual action, such as in the case of a monopoly.

Monopoly

A market structure with only one seller and no competitive pressure, leading to higher prices, lower quantities, and a deadweight loss.

Public Goods

Goods or services defined by economists as being both nonrival and nonexcludable.

Rivalry

A property of a good or service where one person's consumption takes away from the amount available for others to consume.

Nonrival

A property where one individual's consumption of a good or service does not reduce the amount available for others, such as enjoying a beautiful landscape view.

Excludability

A characteristic of goods where individuals can be prevented from consuming the product if they do not pay or contribute.

Nonexcludable

A property where individuals cannot be excluded from consuming a good or service even if they fail to pay or contribute for its provision.

Private Goods

Goods that are both rival in consumption and excludable, such as apples, phones, or backpacks.

Free Rider Problem

A situation where users of a nonexcludable and nonrival good do not pay for it, leading to underprovision by private markets.

Bystander Effect

A psychological phenomenon illustrated by the $1964$ murder of Kitty Genovese, where individuals do not intervene in an emergency because incentives are misaligned.

Mandatory Taxes

The form of mandatory payment used by governments to fund public goods and solve the free rider problem.

Basic Research

A type of research that creates nonrival and nonexcludable public knowledge, which is typically underfunded by profit-oriented private providers.

Social Capital

The extent of concern for others, or other-regarding preferences, which can help resolve free riding problems by realigning private and social incentives.

Club Goods

Goods that are excludable but nonrival, such as Cable TV, Disney World, or country roads.

Open Access Resources (Commons)

Resources that are rival but nonexcludable, meaning one person's use reduces availability for others but no one can be prevented from using them.

Tragedy of the Commons

The depletion of renewable resources resulting from misaligned incentives where rivalry and nonexcludability lead to overexploitation or plunder.

Adjusted for Inflation

The process of modifying economic data, such as charitable giving numbers, to represent real value dollars by accounts for price level fluctuations.

Consumption Externality

A problem where one person's consumption increases scarcity for others (rivalry), but nonexcludability prevents them from being kept away from the resource.