Lecture 3 Flashcards
Externality
when the actions of one individual (or firm) have a direct, unintentional, and uncompensated effect on the well-being of other individuals or the profits of other firms
Three key words of externalities
Direct, Unintentional, Uncompensated
problem with externalities for market outcomes
There is no market or price for the externality
Production externality
generated by a firm in the process of producing some output
Consumption externalities
generated by an individual in the process of consuming an output
positive externalities
impose external benefits
Equation for social marginal cost
Private marginal cost (PMC) + external marginal cost (EMC)
Public goods
goods shared by all and owned by no one
Non-rival idea
the amount of any individual’s consumption does not diminish the amount available for others
non-excludable idea
individuals cannot be prevented from enjoying a public good (even if they did not contribute to it)
free rider problem
occurs when those who benefit from resources, pubic goods, or services of a communal nature, do not pay for them or under-pay
Lindahl pricing
charging each group equal to their marginal benefit of Q*
Negative Externalities
impose external costs
How to calculate social marginal benefit (SMB)
Private marginal benefit (SMB) + External marginal benefit (EMB)
Private goods
When only one person can consume each unit
