ECON 200: Production, Externalities, and Public Goods

Comprehensive review flashcards covering short-run and long-run production costs, negative and positive externalities, corrective policies, Coase bargaining, public goods, and common resources.

Explicit cost

An out-of-pocket payment made by a firm for resources, including wages, rent paid to a landlord, utilities, and materials.

Implicit cost

The opportunity cost of using resources the firm already owns, such as an owner's forgone salary or forgone rent from an owned building.

Accounting profit

Total revenue minus explicit costs ($\text{Accounting Profit} = \text{TR} - \text{explicit costs}$).

Economic profit

Total revenue minus all economic costs ($\text{Economic Profit} = \text{TR} - (\text{explicit costs} + \text{implicit costs})$).

Economic cost

The full opportunity cost of production, equal to explicit costs plus implicit costs ($\text{Economic Cost} = \text{Explicit Costs} + \text{Implicit Costs}$).

Production function

The mathematical relationship showing the maximum output obtainable from specified inputs, written as $Q = f(L, K)$.

Short run

A production horizon in which at least one input (such as capital) is fixed while other inputs (such as labor) can vary.

Long run

A planning horizon in which all inputs are variable, allowing a firm to adjust plant size, technology, staffing, and contracts.

Average product (AP)

Total output divided by the units of variable input ($\text{AP} = \frac{Q}{L}$), representing output per worker.

Marginal product (MP)

The additional output resulting from adding one more unit of a variable input ($\text{MP} = \frac{\Delta Q}{\Delta L}$).

Diminishing marginal returns

The short-run principle that as successive units of a variable input are added to fixed inputs, the marginal product of the variable input eventually falls.

Fixed cost (FC)

Cost that does not change with the level of output in the short run.

Variable cost (VC)

Cost that changes as the firm changes its level of output.

Total cost (TC)

The full short-run cost of producing a given output, calculated as $\text{TC} = \text{FC} + \text{VC}$.

Average fixed cost (AFC)

Fixed cost per unit of output ($\text{AFC} = \frac{\text{FC}}{Q}$), which continuously falls as output increases.

Average variable cost (AVC)

Variable cost per unit of output, calculated as $\text{AVC} = \frac{\text{VC}}{Q}$.

Average total cost (ATC)

Total cost per unit of output, calculated as $\text{ATC} = \frac{\text{TC}}{Q} = \text{AFC} + \text{AVC}$.

Marginal cost (MC)

The additional cost of producing one more unit of output ($\text{MC} = \frac{\Delta \text{TC}}{\Delta Q}$).

Short-run shutdown condition

The condition where price falls below average variable cost ($P < \text{AVC}$), meaning the firm minimizes losses by shutting down temporarily.

Long-run average cost (LRAC)

A curve tracing the lowest attainable average cost for each output level when all inputs can be varied.

Economies of scale

A situation where long-run average cost falls as output scale increases, often due to worker specialization or spreading setup costs.

Constant returns to scale

A range where long-run average cost remains approximately flat as output expands because output and total cost increase proportionately.

Diseconomies of scale

A situation where long-run average cost rises as output expands due to management coordination difficulties, congestion, or organizational complexity.

Six-tenths rule

An empirical rule of thumb stating that expanding a production facility's capacity increases total cost by approximately $0.6$ times the percentage increase in output, demonstrating economies of scale.

Externality

A cost or benefit resulting from a market transaction that affects third parties who are not part of the transaction and is not fully reflected in market prices.

Negative externality

An unpriced spillover that imposes costs or harm on third parties outside the market transaction.

Positive externality

An unpriced spillover benefit that extends to individuals or firms outside the purchase or investment decision.

Marginal private cost (MPC)

The direct out-of-pocket cost incurred by the producer to make one additional unit of output.

Marginal external cost (MEC)

The additional monetary or physical harm imposed on third parties from producing one more unit of a good.

Marginal social cost (MSC)

The total cost to society of producing one additional unit, equal to marginal private cost plus marginal external cost ($\text{MSC} = \text{MPC} + \text{MEC}$).

Marginal private benefit (MPB)

The benefit received directly by the buyer or decision maker from consuming one additional unit.

Marginal external benefit (MEB)

The additional spillover benefit created for third parties when one more unit is produced or consumed.

Marginal social benefit (MSB)

The full benefit to society from one additional unit, equal to marginal private benefit plus marginal external benefit ($\text{MSB} = \text{MPB} + \text{MEB}$).

Socially efficient quantity ($Q^*$)

The level of output where marginal social benefit equals marginal social cost ($\text{MSB} = \text{MSC}$), maximizing total net social surplus.

Deadweight loss (DWL)

The total economic surplus lost to society when market output diverges from the socially efficient output level ($Q^*$).

Command-and-control regulation

A regulatory approach that directly dictates maximum allowable emission levels, specific performance standards, or mandated pollution-control technologies.

Corrective tax (pollution charge)

A per-unit fee or tax placed on emissions or output designed to internalize an external cost by aligning private cost with social cost.

Marginal abatement cost (MAC)

The cost incurred by a firm to reduce or eliminate one additional unit of pollution.

Marketable permit (allowance)

A tradable legal authorization issued under an emissions cap allowing the holder to emit a specified quantity of pollution, such as one metric ton of $\text{CO}_2$ equivalent.

Coase theorem

The principle that if property rights are well-defined and transaction costs are sufficiently low, private parties can negotiate mutually beneficial agreements to achieve the efficient outcome without government intervention.

Transaction costs

The total expenses of searching for bargaining partners, sharing technical information, negotiating terms, reaching contracts, and enforcing agreements.

Excludability

A characteristic of a good indicating whether it is technologically and economically feasible to prevent nonpayers from consuming it.

Rivalry

A characteristic of a good indicating that one individual's consumption of a unit reduces the amount or quality available for others.

Private good

A good that is both excludable and rival in consumption, such as a meal or a pair of shoes.

Club good

A good that is excludable but nonrival when capacity is available, such as a paid video streaming subscription or an uncongested toll road.

Common resource

A good that is rival in consumption but nonexcludable, such as an open-access fishery or a shared groundwater basin.

Public good

A good that is both nonexcludable and nonrival in consumption, such as national defense, street lighting, or public weather warnings.

Free rider

A person who consumes or benefits from a nonexcludable good without contributing toward the cost of providing or maintaining it.

Tragedy of the commons

The tendency for individually rational, unconstrained access decisions to collectively deplete, degrade, or ruin an open-access common resource.

Vertical summation

The aggregation method used for public goods where the marginal willingness to pay of all individuals is summed vertically at each quantity to derive the marginal social benefit curve.

Patent

A government-granted legal monopoly giving an inventor exclusive rights to produce or license a newly developed product or process for a specified time period.

Community governance (Ostrom's framework)

A system demonstrated by Elinor Ostrom where local communities successfully manage shared common resources through clear boundaries, user monitoring, graduated sanctions, and low-cost dispute resolution mechanisms.