Chapter 9: Externalities and Market Efficiency

These flashcards cover key concepts related to externalities, market efficiency, and solutions to manage public goods and common pool resources.

What is an externality?

A cost or benefit imposed on third parties not directly involved with a market transaction.

What are negative spillover costs?

Costs such as pollution that negatively affect third parties.

What are positive spillover benefits?

Benefits like education that provide advantages to third parties.

What is a pecuniary externality?

Market transactions that affect others only through price changes.

What tends to be the market outcome when there are spillover costs?

Markets with spillover costs tend to be inefficient and result in deadweight loss.

What conditions determine efficiency in a market?

The conditions are Marginal Social Cost (MSC), Marginal Private Cost (MPC), and Marginal External Cost (MEC).

What happens in markets with positive externalities?

Positive externalities result in the market producing less than the efficient level.

What is the Coase theorem?

Bargaining leads to efficiency if property rights are well defined, transaction costs are minor, and the number of individuals involved is small.

What is the purpose of command and control policies?

To directly restrict the level of production or mandate the use of certain technology.

What are Pigouvian taxes?

Corrective taxes designed to incentivize market behavior toward socially optimal outcomes.

What is the tragedy of the commons?

The overuse and depletion of shared resources due to self-interest causing a lack of ownership and unrestricted access.

What is the problem with public goods?

Individuals benefit from a public good without paying, which limits market provision and often requires government intervention.

What are the two main solutions for managing common pool resources?

Government regulation and privatization.