Externalities and Public Goods

This set of flashcards covers key concepts from microeconomics related to externalities and public goods, including definitions and examples that will aid in understanding and preparing for the exam.

Externality

An economic activity that has a spillover cost or benefit for a bystander.

Negative Externality

An economic activity that has a negative spillover effect.

Positive Externality

An economic activity that has a positive spillover effect.

Social Benefits of Education

Benefits such as higher individual wages, increased tax revenues, reduced reliance on social programs, decreased crime, and more innovation.

Coase Theorem

States that private bargaining will lead to an efficient allocation of resources without the need for government intervention.

Pigouvian Tax

A tax intended to incentivize a firm to produce the socially optimal level of output by penalizing negative externalities.

Pigouvian Subsidy

A subsidy aimed at increasing consumption to the socially optimal level for positive externalities.

Rival Goods

Goods that only one person can consume at a time.

Nonrival Goods

Goods that can be consumed by more than one person at the same time.

Excludable Goods

Goods that must be paid for in order to consume them.

Non-excludable Goods

Goods that can be consumed even if they are not paid for.

Free Rider Problem

When an individual does not pay for a good because it is non-excludable.

Tragedy of the Commons

The overuse that results from open access to common pool resources.

Private Provision of Public Goods

Occurs when private citizens contribute to the production or maintenance of a public good.

Government Solutions to Externalities

Includes command-and-control policies and market-based policies to address externalities.

Market-Based Policies

Policies that provide incentives for private organizations to internalize externalities.