Externalities, Public Goods, & Common Resources Flashcards
What is an externality?
A side affect the production (seller) or consumption (buyer) of a good/service has on a third party member.
What is a negative externality?
When an activity (production or consumption) generates an external COST that effects third party members. EX: Pollution
What is a positive externality?
When an activity (production or consumption) generates an external BENEFIT that effects third party members. EX: education, vaccination
What is private value?
Consumers’ willingness to pay (demand)
Customer: What kind of benefit can I get out of this product? Is the benefit worth the price?
We can call the Demand Curve the _____.
Marginal Benefit Curve
What is private cost?
Producers’ willingness to sell (Supply)
Producer: How much profit can I get from selling this product? Is the profit worth the cost of making said product?
We can call the Supply curve the ____
Marginal Cost Curve
In the presence of a negative externality, the _____ is _____ than _______
Marginal Social Cost is greater than producers’ Marginal Cost
The Market Equilibrium is LESS than the social equilibrium when there is a _____.
Negative Externality
In the presence of a positive externality, ______ is _____ than _____
Marginal Social Benefit is greater than consumers’ Marginal Benefit.
The Market Equilibrium is GREATER than the Social Equilibrium when there is a ____.
Positive Externality
How much should you tax a good/product for a negative externality to be internalized?
The tax should be set equal to the marginal external cost
How does the government solve negative externalities?
Taxes
How does the government solve positive externalities?
Subsidzing goods
What is the Coase Theorem?
When affected parties can negotiate with one another without cost, externality problems can be solved efficiently
What does it mean for a good to be rival in consumption?
Where one’s use diminishes other people’s usage. So many people want it
EX: Prime
What does it mean for a good to be excludable?
When a good/service is limited to ONLY paying customers or those who pay for it.
EX: golf club memberships
What is a private good?
A good that’s BOTH rival and excludable.
EX: Expensive shoes- it is rival yet only people can have it if they pay a large sum of money for it
What is a common resource?
A good that is rival but NOT excludable
EX: Hunting for animals- it is rival (there’s competition) but you don’t have to pay a fee or a permit in order to hunt for animals.
What is a Public Good?
A good that is BOTH NOT rival and excludable
EX: Public Parks- there’s no rivalry in order to use a public park (it’s public) and you don’t have to pay in order to go into a park or use it (it’s free for anyone to go to)
What is a Club Good?
A good that is NOT rival but it is excludable
EX: Wi-Fi- there’s no rival in using wifi (anyone can use it) except you have to pay money in order to have wi-fi.
What kind of good is involved in the Free Rider problem?
A Public Good
This is because public goods are nonexcludable, meaning they don’t have to pay for the good which causes an overproduction of said good.
What kind of good is involved in the Tragedy of the Commons?
Common Resources
This is because common goods are rival but they don’t have to pay anything which leads to overconsumption of the good.
What is the Free Rider Problem?
Someone who enjoys the benefits of a good/service without paying for it.
What is the Tragedy of the Commons?
When a good is overconsumed to the point where it creates negative affects.
EX: Too much hunting leads to the extinction of fish
