Externalities: Key Terms

Club goods: Are non-rival but excludable.

Coase Theorem: The Coase Theorem states that private bargaining will result in an efficient allocation of resources.

Command-and-control regulation: Either directly restricts the level and production or mandates the use of certain technologies.

Common pool resource goods: Are rival and non-excludable.

Corrective subsidies or Pigouvian subsidies: A tax designed to induce agents who produce positive externalities to increase quantity toward the socially optimal level.

Corrective taxes or Pigouvian taxes: A tax designed to induce agents who produce negative externalities to reduce quantity toward the socially optimal level.

Externality: An externality occurs when an economic activity has either a spillover cost or a spillover benefit on a bystander.

Free-rider problem: Occurs when an individual who has no incentive to pay for a good does not pay for that good because nonpayment does not prevent consumption.

Internalizing the externality: When agents account for the full costs and benefits of their action, they are internalizing the externality.

Market-based regulatory approach: Internalizes externalities by harnessing the power of market forces.

Non-excludable goods: Once a non-excludable good is produced, it is not possible to exclude people from using the good.

Non-rival goods: A good whose consumption by one person does not prevent consumption by others.

Pecuniary externality: Occurs when a market transaction affects other people only through market prices.

Private goods: Are rival and excludable.

Private provision of public goods: Takes place when private citizens make contributions to the production or maintenance of a public good.

Property right: Gives someone ownership of a property or resources.

Public goods: Is both non-rival and non-excludable.

Transaction costs: The costs of making an economic exchange.

Tragedy of the commons: Results when common pool resources are dramatically overused.