Externalities and Public Goods

Flashcards covering key concepts related to externalities and public goods.

Externality

The uncompensated impact (or side effect) of one person’s/firm’s actions on the well-being of a bystander.

Positive Externality

A situation where the impact is beneficial, but the benefit cannot be charged for.

Negative Externality

A situation where the impact is harmful, but the cost cannot be charged for not providing.

Market Failure

A situation defined by an inefficient distribution of goods and services in the free market, resulting in total surplus not being maximized.

Marginal Private Cost (MPC)

The cost of producing an additional unit of a good, represented by the supply curve.

Marginal External Cost (MEC)

The cost on bystanders of producing an additional unit, such as pollution.

Marginal Social Cost (MSC)

The total cost to society of producing an additional unit, including private and external costs.

Socially Optimal Quantity

The efficient quantity of a good that should be produced, considering the interests of buyers, sellers, and bystanders.

Tragedy of the Commons

The depletion or spoiling of a common resource through individual users acting according to their own self-interest.

Non-excludable Good

A good that cannot prevent non-payers from using it.

Rival in Consumption

A characteristic of a good where one person's use diminishes the amount available for others.

Public Good

A good that is non-excludable and non-rival, such as national defense.

Free Rider Problem

A situation where individuals benefit from resources, goods, or services without paying for them, leading to the underproduction of public goods.

Coase Theorem

A theory stating that private parties can negotiate solutions to externalities without government intervention if property rights are established and transaction costs are low.

Corrective Tax

A tax designed to reduce the negative externality by making it costlier to produce the harmful product.

Subsidy

A financial incentive provided to encourage the production or consumption of a good that generates a positive externality.

Cap and Trade

A market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants.