paid by buyer or seller
🌐MICROECONOMICS STUDY GUIDE
Externalities, Public Goods, and Policy
Analyze spillover costs, spillover benefits, public goods, common resources, taxes, and permits.
8 key ideas8 flashcards5 practice questions
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Private trades may leave costs or benefits outside the price.
falls on a third party
private cost plus spillover cost
Key ideas to know
Start with the relationships between ideas. Then close the notes and explain each one from memory.
- 01
An externality affects a third party outside the buyer-seller transaction.
- 02
A negative production externality makes social marginal cost exceed private marginal cost.
- 03
A positive externality makes social marginal benefit exceed private marginal benefit.
- 04
An unregulated market with a negative externality tends to produce too much relative to the efficient amount.
- 05
A corrective tax can align a private decision with an external cost.
- 06
Tradable permits set a total quantity and allow firms to trade rights.
- 07
A public good is nonrival and nonexcludable.
- 08
A common resource is rival but difficult to exclude people from using.
PART OF THE MICROECONOMICS GUIDE
See every set in this course and follow a focused review order.
Open the full Microeconomics guide →Two ideas worth correcting now
NOT QUITE
→Every government action fixes a market failure
USE THIS INSTEAD
Policy can have information, enforcement, and incentive costs of its own.
NOT QUITE
→Public goods are simply goods provided by government
USE THIS INSTEAD
The term refers to nonrivalry and nonexcludability, regardless of provider.
Flashcards
Answer before opening each card. The effort to retrieve is part of the learning.
1What is an externality?Show answer ＋
A cost or benefit imposed on a third party outside a transaction.
2What does a negative externality do to social cost?Show answer ＋
Raises it above the private cost.
3What is a corrective tax?Show answer ＋
A tax tied to an external cost.
4What do tradable permits fix directly?Show answer ＋
The total permitted quantity.
5What two traits define a public good?Show answer ＋
Nonrivalry and nonexcludability.
6What is the free-rider problem?Show answer ＋
People can benefit without paying, weakening private provision.
7What defines a common resource?Show answer ＋
Rival use with difficult exclusion.
8What is the Coase result?Show answer ＋
With clear rights and low bargaining costs, parties may bargain toward an efficient allocation.
Explain it in your own words
Use the answer as a check after you have written or spoken your response.
01Why does pollution lead an unregulated market to overproduce?
Producers count private cost but may omit damage imposed on others.
02How does a corrective tax alter the firm's calculation?
It adds the external cost to the private marginal cost faced by the decision maker.
03How do permits differ from a tax?
Permits fix quantity and let price adjust; a tax fixes the charge and lets quantity adjust.
04Why may a lighthouse be underprovided privately?
Ships can receive the signal without reducing others' use and may be hard to exclude from it.
05Why can a fishery be depleted?
Each catch reduces what remains for others while access may be difficult to restrict.
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