Econ Externalities (Chapter 5/6)

Externality

when the actions of consumers or producers give rise to negative or positive side-effects on other people who are not part of these actions and whose interests are not taken into consideration

Common Pool Recources

Resources that are not owned by anyone, don't have a price and are available for anyone to use without payment or any other restriction.

Rivalrous

The consumption/use of the good or service by one person reduces the availability of it for another person.

non-rivalrous

One person's consumption of a good does not limit another person's consumption.

Excludable

it is possible to exclude people from using the good (typically by placing a price tag on it)

Non-excludable

It is not possible to exclude someone from using a good or resource

Tragedy of the Commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

Unsustainable production

production that uses resources unsustainably, depleting or degrading them

Market Failure

failure of the market to allocate resources efficiently

Allocative inefficiency

too much or too little of goods/services are produced and consumed from the point of view of what is socially most desirable

Positive Externality

beneficial side effect that affects third parties- people feeling effects of the externality- (external/spill over benefits)

Negative Externality

negative side effect that affects a third party (external/spill over costs)

Socially Optimum Output

A social optimum refers to a "best" situation from the point of view of allocative efficiency

Marginal Private Costs (MPC)

costs to producers of producing one more unit of a good

Marginal Social Costs (MSC)

The extra costs to society of producing one more unit of good.

Marginal Private Benefits (MPB)

benefits to consumers from consuming one more unit of a good

Marginal Social Benefits (MSB)

benefits to society from consuming one more unit of a good

Negative Production Externalities

external costs created by producers

Pigouvian Tax

indirect tax on the firm per unit of output produced the government could impose

Carbon Tax

a tax per unit of carbon emissions of fossil fuels

Tradable Permits

(cap and trade schemes) A policy involving permits to pollute issued to firms by a government or international body

Collective Self-governance

a solution to the use of common pool resources where the users take control of the resources and use them in a sustainable way

Negative Consumption Externalities

external costs created by consumers

Demerit Goods

Goods that are considered to be undesirable for consumers and are over-provided by the market. Reasons for over-provision may be that the good has negative externalities. Example: cigarettes.

Positive Production Externality

External benefits created by producers

Positive Consumption Externality

external benefits are created by consumers

Merit Goods

Goods that are held to be desirable for consumers, but which are underprovided by the market.

Public Goods

Characteristics: non-rivalrous & non-excludable

Free Rider problem

occurs when people can enjoy the use of a good without paying for it

Contracting Out

Occurs when a government makes an agreement (or contract) with a private firm to carry out an activity that the government was previously doing itself.