5.5 Key Terms
Key Terms
The effect of market exchange on a third party who is outside or “external” to the exchange (5.1)
When we add external costs to private costs. In the presence of a negative externality (with a constant marginal external cost), this curve lies above the supply curve at all quantities. (5.1)
When we add external benefits to private benefits. In the presence of a positive externality (with a constant marginal external benefit), this curve lies above the demand curve at all quantities. (5.1)
Externalities can be negative or positive. If you hate country music, then having it waft into your house every night. (5.1)
A tax that addresses a negative externality by taxing the good instead of the actual external cost.
Occurs when the market interaction of others presents a benefit to non-market participants. If you love country music, then what amounts to a series of free concerts
(5.1)
Private markets only consider consumers, producers, and the government – the impacts on external parties are irrelevant. (5.1)
Public goods have two defining characteristics: they are nonexcludable and non-rival. (5.4)
Externalities that occur in market transactions that affect other parties beyond those involved.
States that if property rights are well-defined, and negotiations among the actors are costless, the result will be a socially efficient level of the economic activity in question. It is one of the most important and influential theorems in economics. (5.2)
