week 12 Flashcards
what is a negative externality
a cost of an activity that falls on people other than those who pursue the activity
what is a positive externality
a benefit of an activity recieved by people other than those who pursue the activity
how do people tend to make decisions in relation to externalities
people make decisions based on costs they actually incur and the benefits they actually receive
a positive externality will be undertaken at a level less than socially optimal
a negative externality will be undertaken at a level greater than socially optimal
the socially optimum level of some good should equate the marginal social benefit with the marginal social cost
when externalities are present, the market outcome may be inefficient
what is the coase theorem
if contracting is possible at no cost, people can always arrive at efficient solutions to the problems caused by externalities
what are the disadvantages of the coase theorem
implies that negotiations are costless, practically is not true
when negotiation is costly, legal remedies can be used to correct for externalities
these policies are meant to bring social incentives in line with private incentives
what is excludability
a person can be prevented from using a particular good
what is rivalry
one persons use of a good diminishes other peoples use
what is a private good
a good that is excludable and rivalrous
eg mobile phone
what is a collective good
a good that is excludable and non-rivalrous
what is a common good
a good that is non-excludable and rivalrous
eg fish in the ocean
what is a public good
a good that is non-excludable and non-rivalrous
eg national defence
lower incentive to own the good or pay towards its upkeep
what is the tragedy of the commons
idea that common goods tend to be used more than socially desirable
what is marginal private benefit
additional benefits that a consumer receives from consuming one more unit of a good or service
what is marginal social cost
the cost that society pays as a result of the production of additional units or utilization of a good or service
what is free-riding
individually optimal thing to do is not contribute towards a public good and just reap the benefits of everyone else paying in
if everyone thinks this way it leads to market failure
