Chapter 2 Public goods and externalities Flashcards
What are private goods ?
Goods that are excludable and rival in consumption (for example: private gyms, concert tickets )
What are public goods ?
Goods that are non excludable and non rivalry (for example: national defence)
What is excludability?
it is possible to prevent other individuals from consuming that good or service
What is rivalry/ diminishable ?
an individual’s consumption of that good reduces the quality & quantity available for consumption by others
Marginal cost of public goods is
0
What is free rider problem ?
ppl having an incentive to use a good without paying for it
Why non provision of public goods considered as market failure?
private sectors choose not to supply as they cannot be sure of making an economic profit
free rider problem
What is social efficiency ?
An optimal distribution of resources in the society
Social efficiency is achieved when
MSC = MSB
MSB =
marginal private benefit plus external benefit
MSB definition
amt ppl are willing to pay for the additional unit of good/ service
MPB definition
increase in private benefit resulting from consuming an extra unit of good
XMB definition
additional benefit imposed on third party due to consuming an extra unit of that good
MSC =
marginal private cost + external cost
MSC definition
change in society’s total cost of production of additional unit of good/ service
MPC definition
change in producer’s total COP due to production of additional unit of good/ service
XMC definition
change in the cost to third parties due to production of additional unit of good/ service
What is externality ?
impact of one person’s action on the well being of a bystander
What is neg externality ?
social cost > private cost
occurs when production/ consumption impose external costs to third parties
What is social cost ?
Total cost to the entire society (private cost + external cost)
What is social benefit ?
Total benefits to the whole society (private benefit + external benefit)
Neg externalities in production means there is an
overproduction
Neg externalities in consumption means there is an
overconsumption
What is pos externality ?
social benefit > private benefit
occurs when production/ consumption has positive impacts on third parties
Pos externalities in consumption means that there is an
underconsumption
Pos externalities in production means that there is an
underproduction
What are demerit goods ?
goods that impose external costs when consumed (tobacco, drugs)
Why overprovision of demerit goods are considered as market failure?
there is overproduction by the market (resources overallocated), overconsumption, they generate neg ext
What are merit goods?
goods that are underprovided and underconsumed in the economy ( education, vaccinations )
Why under provision of merit goods are considered as market failure ?
they generate pos externalities, there is underproduction by the market, underconsumption
Why market tends to underprovide merit goods?
i) they generate pos ext
ii) unequal distribution of income
iii) consumers lack perfect info
iv) consumers uncertain abt their future needs
v) monopoly power may arise
