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16 Cards in this Set
- Front
- Back
Externality
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The uncompensated impact of one person's actions on the well-being of a bystander
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Internalizing the externality
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altering incentives so that people take account of the external effects of their actions
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Negative externalities lead markets to produce a larger quantity than is socially desirable
Positive externalities lead markets to produce a smaller quantity than is socially desirable |
True
to remedy this problem, the government can internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities |
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Transaction Costs
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The costs that parties incur in the process of agreeing to and following through on a bargain or contract
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Coase Theorem
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Private economic actors can solve the problem of externalities among themselves. Whatever the initial distribution of rights, the intereste parties can always reach a bargain in which everyone is better off and the outcome is efficient
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Excludability
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The property of a good whereby a person <i><b>can</i></b> be prevented from using it
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Rivalry in Consumption
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The property of a good whereby one person's use diminishes other people's use
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4 Types of Goods (REVEW PAGE 226)
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Private
Natural Monopolies Common Resources Public Goods |
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Private Goods
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goods that are <i>both</i> excludable and rival in consumption
-clothing ice cream cones -congested toll roads |
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Public Goods
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Neither excludable nor rival in consumption
-Tornado Siren -National Defense -Uncongested nontoll Roads Because public goods are NOT excludable, the free-rider problem prevents the private market from supplying them In deciding whether something is a public good, one must determine who the beneficiaries are and whether these beneficiaries can be excluded from using the good. |
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Common Resources
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Goods that are rival in consumption but not excludable
-Fish in the ocean -The environment -Congested nontoll roads |
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Natural Monopoly
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A good IS excludable but NOT rival in consumption
-Fire Department |
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Free Rider
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a person who receives the benefit of a good but avoids paying for it
Free rider problem occurs when the # of beneficiaries is large and exclusion of any one of them is impossible. If a lighthouse benefits many ship captains, it is a public good. Yet if it primarily benefits a single port owner, it is more like a private good. |
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What are 3 of the most important Public Goods?
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National Defense
Basic Research Fighting Poverty |
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Cost Benefit Analysis
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A study that compares the costs and benefits to society of providing a public good
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Tragedy of the Commons
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A parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
Teaches us that when one person uses a common resource, he or she diminishes other peoples enjoyment of it. (sheep overgrazing a pasture) modern day example = Environmental degradation |