Econ 110A Week Nine: Externalities and Public Goods

These flashcards cover key concepts related to externalities and public goods, essential for understanding economic implications and solutions.

Externalities

A side effect of an activity that impacts other people or firms who are not taking part in that activity.

Negative Externality

When a person's choices impose indirect costs on others.

Positive Externality

When a person's choices yield indirect benefits to others.

Socially Optimal Quantity

The efficient quantity for society that includes the interests of buyers, sellers, and bystanders.

Marginal Private Benefit

The marginal benefits to a buyer from purchasing one more unit, which corresponds to the demand curve.

Marginal Social Benefits

Total benefits from one more unit, calculated as Marginal Private Benefits plus Marginal External Benefits.

Corrective Tax

A tax applied to negative externalities at a level equal to the marginal external cost.

Pigouvian Tax

Another term for a corrective tax aimed at addressing negative externalities.

Free Rider Problem

The issue that arises when individuals benefit from a good without paying for it, leading to underproduction.

Tragedy of the Commons

The phenomenon where shared resources are overused due to private benefits and shared costs.

Coase Theorem

The principle that if bargaining is costless and property rights are clear, externality problems can be solved by private negotiation.

Public Goods

Nonexcludable and nonrival goods that create externality problems due to free riding.

Corrective Subsidy

A subsidy for positive externalities equal to the marginal external benefit.

Cap and Trade Policy

Government sets quotas for negative externalities and allows permit trading among firms.

Private Bargaining

Negotiation between parties to address and solve externality issues.