Ch. 9 Externalities, Public Goods, and Common Pool Resources

What is an externality?

occurs when an economic activity has either a spillover cost or a spillover benefit on a bystander

What is a negative externality?

impose an additional cost on society that is not explicitly recognized by the buyers and sellers in the market

What is a positive externality?

when an economic activity has a spillover benefit that is not considered when people make their own decisions

• created external benefits that are reaped by others

What is a pecuniary externality?

occurs when a market transaction affects other people only through market prices

Do all externalities generate market inefficiencies?

No

What is the relationship of MSC = MPC +MEC and its elements?

• Marginal Social Cost = Marginal Private Cost + Marginal External Cost

• firms do not take into account MEC

• Negative externality

  • social cost = private cost + external cost

  • (PC = cost of producing the good or service, EC = value of the negative externality)

What is the relationship of MSB = MPB + MEB and its elements?

• Marginal Social Benefit = Marginal Private Benefit + Marginal External Benefit

• consumers do not take into account MBC

• Positive externality

  • social benefit = private benefit + external benefit

  • (PB = cost of producing the good or service, EB = value of the negative externality)

Are markets that experience spillovers in terms of costs or benefits efficient?

• not typically efficient

• costs = negative externalities

  • benefits = positive externalities

What are the outcomes of markets that exhibit an externality (positive or negative)?

• positive

  • underproduction

  • deadweight (missing out on social benefits)

• negative

  • overproduction

  • deadweight (loss of total societal welfare)

What are the ways at restoring efficient in markets with externalities?

• private solutions

  • Private Bargaining (property rights, low transaction costs, effective bargaining and enforcement)

  • Coase Theorem

  • Willingness to Pay (to eliminate or mitigate the external costs or benefits)

• government solutions

  • command and control policies

  • market based incentives (Pigouuvian taxes and subsidies)

What is a private good?

rival and excludable

what are club goods?

non-rival but exculdable

what are public goods?

non-rival and non exculdable

what are common pool resources?

rival and non excludable

What does it mean for a good to be rival in consumption?

a good whose competition by one person does prevent the consumptions of others

What does it mean for a good to be excludable?

once produced, it is possible to exclude people from using it

What is a free rider problem?

when an individual who has no incentive to pay for a good does not pay for that good because nonpayment does not prevent consumption

Why is a free rider problem an issue for public goods?

we want public goods but aren’t willing to pay for them because we can’t be excluded from them once they are provided

Are all goods provided by government entities?

no not all cases because private sector provide them too

how is the market demand curve for a public good derived?

vertically summing the individual curves

what is a common pool resource?

rival and non excludable, consume as much as they want (anybody)

what is the tragedy of the commons?

results when common pool resources are dramatically overused

Why do tragedy of the commons arise?

when a common pool resource is used intensely

What are the solutions to the tragedy of the commons?

interventions can be used by government or other organized public or private regulatory bodies (ex: pigouvian taxes) — when feasible (privatization of a resource)