PBPL Economic Concepts

externalities

occur when the full social cost or benefit of an action is not captured by private market places ex. pollution, congestion, health damage

public vs. private goods

A public good is non-excludable and non-rivalrous while a private good is excludable and rivalrous. (classified based on excludability and rivalry) ,

free rider problem

when people benefit from a good without paying for it, leading to underfunding of public goods. (ex. group project, there are always free riders)

common access goods 

goods that are non-excludable but rivalrous — anyone can use them, but ones use reduces others ability to use it. (ex. fish in international waters or public parks on crowded days) common access goods are subject to over exploitation/congestion 

club goods

goods that are excludable but non-rivalrous. people can be kept out unless they pay, but one persons use doesn’t reduce another’s. (ex. cinemas, private parks, gym memberships)  

excludability 

a good is excludable if people can be prevented from using it unless they pay. ex. you need a ticket to enter a concert

rivalry

a good is rivalrous if one persons use reduces the amount available for others. ex. if you eat and apple, no one else can

social cost vs private cost

social cost is the total cost to society = private + external cost (pollution or health damage) and private cost is the cost paid by producers in the market (ex. labor or materials) 

when social cost > private cost, markets overproduce causing inefficiency 

willingness to pay (WTP)

The maximum amount an individual is willing to pay for a good or service

Reflects how much value or satisfaction they get from it. 

important for measuring consumer value and market demand 

consumer value

the difference between what a consumer is willing to pay and what they actually pay. 

represents the benefit or surplus consumers receive from a market transaction. 

profit

the difference between total revenue and total cost for a producer 

firms seek to maximize profit by producing where marginal cost = marginal revenue 

efficiency vs market failure

Efficiency occurs when resources are allocated in a way that maximizes total wealth, so private costs and social costs or benefits are aligned. Market failure occurs when markets do not maximize total wealth, often due to externalities, public goods, or a lack of competition. 

in market failure, gov intervention can help restore efficiency