Chapter 16 - Externalities, Public Goods, and Social Choice Flashcards Preview

Principles of Economic > Chapter 16 - Externalities, Public Goods, and Social Choice > Flashcards

Flashcards in Chapter 16 - Externalities, Public Goods, and Social Choice Deck (19):

market failure

Occurs when resources are misallocated or allocated inefficiently



A cost or benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction.


marginal social cost (MSC)

The total cost to society of producing an additional unit of a good or service. MSC is equal to the sum of the marginal costs of producing the product and the correctly measured damage costs involved in the process of production.


marginal private cost (MPC)

The amount that a consumer pays to consume an additional unit of a particular good.


marginal damage cost (MDC)

The additional harm done by increasing the level of an externality-producing activity by 1 unit. If producing product X pollutes the water in a river, MDC is the additional cost imposed by the added pollution that results from increasing output by 1 unit of X per period.


Coase theorem

Under certain conditions, when externalities are present, private parties can arrive at the efficient solution without government involvement.



A court order forbidding the continuation of behavior that leads to damages.


liability rules

Laws that require A to compensate B for damages imposed.


public goods (social or collective goods)

Goods that are nonrival in consumption and/or their benefits are nonexcludable.


nonrival in consumption

A characteristic of public goods: One person’s enjoyment of the benefits of a public good does not interfere with another’s consumption of it.



A characteristic of most public goods: Once a good is produced, no one can be excluded from enjoying its benefits.


free-rider problem

A problem intrinsic to public goods: Because people can enjoy the benefits of public goods whether or not they pay for them, they are usually unwilling to pay for them.


drop-in-the-bucket problem

A problem intrinsic to public goods: The good or service is usually so costly that its provision generally does not depend on whether any single person pays.


optimal level of provision for public goods

The level at which society’s total willingness to pay per unit is equal to the marginal cost of producing the good.


Tiebout hypothesis

An efficient mix of public goods is produced when local land/ housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods.


social choice

The problem of deciding what society wants. The process of adding up individual preferences to make a choice for society as a whole.


impossibility theorem

A proposition demonstrated by Kenneth Arrow showing that no system of aggregating individual preferences into social decisions will always yield consistent, nonarbitrary results.


voting paradox

A simple demonstration of how majority-rule voting can lead to seemingly contradictory and inconsistent results. A commonly cited illustration of the kind of inconsistency described in the impossibility theorem.



Occurs when congressional representatives trade votes, agreeing to help each other get certain pieces of legislation passed.