Ch. 9: Externalities and Public Goods Flashcards
Externality
occurs when an economic activity has either a spillover cost to or a spillover benefit for a bystander.
Pecuniary externalities
occurs when a market transaction affects other people only through market prices.
internalizing the externality
When an agent accounts for the full costs and benefits of his actions, he is internalizing the externality
property right
ownership of property or resources
Coase Theorem
private bargaining will lead to an efficient allocation of resources.
transaction costs
the cost of bargaining itself
command-and-control regulation
either directly restricts the level of production or mandates the use of certain technologies.
market-based regulatory approach
internalizes externalities by harnessing the power of market forces.
corrective taxes or Pigouvian taxes
is a tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level.
corrective subsidies, or Pigouvian subsidies
designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level.
corrective subsidy
designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level.
- In the case of positive externalities, a subsidy is used to correct the externality.
non-excludable
Once a non-excludable good is produced, it is not possible to exclude people from using the good.
non-rival in consumption
One person’s consumption does not preclude consumption by others.
public goods
non-excludable and non-rival in consumption.
Ordinary private goods
excludable and rival in consumption.
- clothes, food, furniture
Club goods
excludable and non-rival in consumption.
- cable TV, wifi, music downloads
Common pool resources
non-excludable and rival in consumption
- fish, water, natural forests
free-rider problem
a person has no incentive to pay for a good because failure to pay doesn’t prevent consumption.
Private provision of public goods
refers to any situation in which private citizens make contributions to the production or maintenance of a public good
tragedy of the commons
occurs when a common resource is used too intensely.
