Externalities, Pigouvian Policies, Coase Theorem & Public Goods

These vocabulary flashcards cover key terms related to externalities, Pigouvian taxes and subsidies, the Coase theorem, public goods, and associated policy tools and examples.

Externality

A cost or benefit from an activity that affects bystanders who are not directly involved in the transaction.

Negative Externality

An external cost that leads markets to produce more than the socially efficient quantity.

Positive Externality

An external benefit that leads markets to produce less than the socially efficient quantity.

Pigouvian Tax

A per-unit tax set equal to the external cost of a good, shifting the supply curve so producers face the full social cost and deadweight loss falls.

Pigouvian Subsidy

A per-unit payment set equal to the external benefit of a good, shifting the demand curve up so consumers/producers internalize full social benefits and deadweight loss falls.

Deadweight Loss

The loss of total (social) surplus that occurs when the quantity traded differs from the efficient quantity.

Social Surplus

The sum of consumer surplus, producer surplus, and any external surpluses; maximized at the efficient quantity.

Internalizing an Externality

Adjusting incentives so decision makers account for all private and external costs and benefits when making choices.

Transaction Costs

All costs required to reach and enforce an agreement, including identifying parties, bargaining, and drafting contracts.

Property Rights

Legally defined ownership or control that determines who bears costs and receives benefits from resource use.

Coase Theorem

If transaction costs are low and property rights are clear, private bargaining will lead to an efficient outcome even with externalities.

Efficient Quantity (Qefficient)

The output level where marginal social benefit equals marginal social cost; maximizes total surplus.

External Cost

A cost imposed on non-participants for every unit of a good produced or consumed.

External Benefit

A benefit received by non-participants for every unit of a good produced or consumed.

Nonexcludable Good

A good for which non-payers cannot be easily prevented from using it.

Nonrival Good

A good whose consumption by one person does not reduce the ability of others to consume the same unit.

Public Good

A good that is both nonexcludable and nonrival, such as national defense or clean air.

Free Rider

Someone who enjoys the benefits of a public good without contributing to its cost.

Forced Rider

Someone who pays for a public good via taxation but receives little or no direct benefit from it.

Tragedy of the Commons

Overuse and depletion of a rival, non-excludable resource because individual incentives diverge from social efficiency.

Asteroid Deflection

Illustrative example of a public good; protecting 7 billion people costs the same as protecting 1 million.

Regulation (Externalities)

Government rules, bans, or limits designed to reduce negative externalities, e.g., texting-while-driving bans or emission caps.

Subsidization (Externalities)

Government payments that lower production costs or prices to increase output of goods with positive externalities, e.g., R&D grants.

COVID-19 Vaccination Externality

Economists estimate each vaccine course yields an external benefit of ≈ $5,800, motivating government coverage of its ~$20–$40 cost.