Ch. 10 Externalities Flashcards
Externality
A side effect of an activity that affects bystanders whose interests aren’t taken into account
Negative Externality
A side effect that harms bystanders
Positive Externality
A side effect that benefits bystanders
Private Interest
Costs and benefits you incur
Societys Interest
All costs and benefits between you and others
Marginal Private Cost
Extra cost the seller incurs to procure one more unit
Marginal External Cost
Cost imposed on bystanders from producing one more unit
Marginal Social Cost
All marginal costs = marginal private costs + marginal external costs
Marginal Private Benefit
Extra benefit enjoyed by a buyer with one more unit
Marginal External Benefit
External benefit given to bystanders from one more unit
Marginal Social Benefit
All benefits = marginal private benefits + marginal external benefits
Socially Optimal Quantity
Outcome that is most efficient for society as a whole
Rational Rule for Society
Produce more of an item as long as its marginal social benefit is greater than or equal to marginal social cost
Coase Theorem
If people can bargain costly and legal rights are clear, externality problems can be solved
Corrective Tax
Tax designed to induce people to take account of the negative externalities they cause
Cap and Trade
Quantity limit implemented by allocating a fixed number of permits, which can be traded
Golden Rule
You should do unto others as you would like them to do unto you
Non-excludable
When someone cannot daily be excluded from using something
Non-rival
A good for which one persons use doesn’t subtract from another’s
Free-rider Problem
When someone can enjoy the benefit of a good without bearing the costs
Rival Good
A good for which your use of it comes at someone else’s expenses
Public Good
A good that is non-excludable and hence subject to the free-rider problem
Club Good
An excludable good, but non-rival in consumption
Common Resources
A good that is rival and non-excludable
Tragedy of the Commons
A tendency to over consume a common resource
