Public Economics Flashcards
What are key characteristics of a public good?
Non-rival consumption: if the good is used by one person, it does not prevent another person using it
Non-excludability: it is not possible to exclude any individual from the benefits of the good (without incurring great cost)
What is the definition of an externality?
There is an externality between A and B if the action of A has an effect on B. B neither pays nor is compensated by A for this effect. Can be positive or negative.
What is the coarse theorem?
The Coase theorem states that under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome.
It implies that the market will solve externalities all by itself unless: (1) property rights are incomplete (for example, no one owns the air) or (2) negotiating is costly (for example, the entire population owns the air, but all citizens cannot simultaneously negotiate about pollution levels).
