Ch. 10 - Externalities & Public Goods Flashcards
What is an Externality?
A side effect of an activity that affects bystanders whose interests aren’t taken into account
What is a Negative Externality? A Positive Externality?
Negative Externality - A side effect that harms bystanders
ex. If I stand up at a concert, you won’t be able to see the stage
Positive Externality - A side effect that benefits bystanders
ex. When I buy a big TV, my roommates will also enjoy watching movies on it
Why do Positive Externalities still lead to Market Failure?
Because individuals do not fully account for the benefits their actions provide to others, resulting in less socially useful activities than is in society’s best interest
What are Marginal Private Costs?
The extra cost paid by the seller from producing one extra unit
What is the External Cost?
The cost imposed on bystanders
What are Marginal External Costs?
The extra cost imposed on bystanders from producing one extra unit
What is the Marginal Social Cost?
All marginal costs (no matter who pays them) = Marginal Private cost + Marginal External Cost
What are Marginal Private Benefits?
The extra benefit enjoyed by the buyer from one extra unit
What is the External Benefit?
A benefit accruing by bystanders
What is the Marginal External Benefit?
The extra external benefit accruing to bystanders from one extra unit
What is the Marginal Social Benefit?
All marginal benefits (no matter who pays them) = Marginal Private Benefit + Marginal External Benefit
What does Socially Optimal mean?
The outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders
What is the Rational Rule for Society?
Produce more of an item if its marginal social benefit >= marginal social cost
What is Coase Theorem?
If bargaining is costless and legal right are clearly established & enforced, then externality problems can be solved by private bargains
What is a Corrective Tax? Corrective Subsidy?
Corrective Tax - A tax designed to induce people to take account of the negative externalities they cause
Corrective Subsidy - A subsidy to induce people to take account of the positive externalities they cause
What is Cap & Trade?
A quantity regulation system implemented by allocating a fixed number of permits, which can be traded
What does Non-excludable mean?
When someone cannot be easily excluded from using something
What does Non-rival mean?
A good for which one person’s use doesn’t subtract from another’s
What is the Free-Rider Problem?
When someone can enjoy the benefits of a good without bearing the costs
What is a Rival Good?
A good for which your use of it comes at someone else’e expense
What is a Public Good?
A non-rival good that is non-excludable & hence subject to the free-rider problem
What is a Club Good?
A good that is excludable, but non-rival in consumption
What is a Common Resource? The Tragedy of Commons?
Common Resource - A good that is rival and also excludable
The Tragedy of Commons - The tendency to over-consume a common resource
