Chapter 16:
Private goods- a good or service that is individually consumed and that can be profitably provided by privately
owned firms because they can exclude non-payers from receiving the benefits.
Public goods – a good or service that is characterized by non-rivalry and non excludability, usually provided by
the government.
Free rider problem- the inability of potential providers of an economically desirable good or service to obtain
payment from those who benefit because of non-excludability.
Cost benefit analysis – a comparison of the marginal coasts of a government project or program with the
marginal benefits to decide whether or not to employ resources in that project or program and to what
extent.
Marginal cost marginal benefit rule – as it applies to the cost benefit analysis, the tenet project that the
government material or program should be expanded to the point where the marginal cost and marginal
benefit of additional expenditures are equal.
Externalities: a cost of benefit from production or consumption, accruing without compensation to someone
other than the buyers and sellers of the product. Negative externality: a cost imposed without compensation on
third parties by the production or consumption of sellers or buyers (example: manufacturer dumps toxic chemicals into a
river, killing the fish sought by sports fishers; an external cost or spillover cost). Positive Externality: a benefit obtained
without compensation by third parties from the production or consumption of sellers or buyers (example: a beekeeper
benefits when a neighboring farmer plants clover).
Coase theorem – the idea, first stated by economist Ronald Coase that some externalities can be resolved
through private negotiations of the affected parties.
Tragedy of the commons- the tendency for commonly owned natural resources to be overused, neglected, or
degraded because their common ownership gives nobody an incentive to maintain or improve them.
Market for externality rights – a market in which firms can buy rights to discharge pollutants. The price of
such rights is determined by the demand for the right to discharge pollutants and a perfectly inelastic supply
of such rights (the latter determined by the quantity of discharges that the environment can assimilate).
Cap-and-trade program- a government strategy for reducing harmful emissions or discharges by placing a
limit on their total amounts and then allowing firms to buy and sell the rights to emit or discharge specific
amounts within the total limits.
Optimal reduction of an externality – the reduction of a negative externality such as pollution to the level at
which the marginal benefit and marginal cost of reduction are equal.
Climate-change problem – the problem of rising world temperatures that most climate experts believe are
caused at least in part by increased carbon dioxide and other greenhouse gases generated as by-products of
human economic activities.
Asymmetric information – A situation where one party to a market transaction has much more information
about a product or service than the other. The result may be an under or overall location of resources.
Moral hazard problem – the possibility that individuals or institutions will change their behavior as the result
of a contract or agreement. For example: banks whose deposits depend are insured against losses may make
riskier loans and investments.
Adverse selection problem – a problem arising when information known to one party to a contract or
agreement is not known to the other party, causing the latter to incur major coasts. Example: individuals who
have the poorest health are most likely to buy health insurance.
