Glossary
Excludable
A characteristic of a good where it is possible to prevent individuals from consuming it if they do not pay for it.
Example:
Access to a streaming service is excludable because you must pay a subscription fee to watch its content.
Externalities
Situations where a private transaction imposes costs or confers benefits on a third party who is not directly involved in the production or consumption of a good or service.
Example:
Your neighbor's decision to get a loud dog creates an externality for you if its barking disturbs your peace and quiet.
Fair Return Quantity
A quantity of output, often in regulated monopolies, that allows the firm to cover its average total costs and earn a normal profit, preventing economic losses.
Example:
A utility company might be regulated to produce at a fair return quantity to ensure it can cover its operational costs and continue providing service without earning excessive profits.
Free-Rider Problem
A situation that occurs with public goods where individuals can benefit from the good without contributing to its cost, leading to underprovision by the market.
Example:
If a neighborhood relies on voluntary contributions for street lighting, some residents might become free-riders, enjoying the light without paying, leading to fewer lights overall.
Gini Coefficient
A numerical measure of income or wealth inequality, ranging from 0 (perfect equality) to 1 (perfect inequality), derived from the Lorenz Curve.
Example:
A country with a Gini Coefficient of 0.2 would have a more equal distribution of income than a country with a coefficient of 0.5.
Government Intervention
Actions taken by the government, such as taxes, subsidies, or regulations, to influence market outcomes and correct market failures.
Example:
Imposing a carbon tax on polluters is a form of government intervention aimed at reducing negative externalities and promoting cleaner production.
Lorenz Curve
A graphical representation that illustrates the distribution of income or wealth within a population, comparing it to a line of perfect equality.
Example:
If the Lorenz Curve for a country bows significantly away from the line of perfect equality, it indicates a high level of income inequality.
Marginal Social Benefit (MSB)
The total benefit to society from consuming one additional unit of a good or service, encompassing both private benefits to the consumer and external benefits to others.
Example:
When a city invests in public transportation, the Marginal Social Benefit includes not only the convenience for riders but also reduced traffic congestion and pollution for everyone else.
Marginal Social Cost (MSC)
The total cost to society of producing one additional unit of a good or service, including both the private costs incurred by the producer and any external costs imposed on others.
Example:
The Marginal Social Cost of producing electricity from a coal plant includes the private cost of fuel and labor, plus the external cost of air pollution on nearby communities.
Market Failure
A situation where the free market fails to produce the socially optimal quantity of a good or service, leading to an inefficient allocation of resources.
Example:
The underprovision of public parks by private companies is an example of market failure because individuals don't pay for their use, leading to less than the ideal amount.
Negative Externalities
Costs imposed on a third party who is not involved in the production or consumption of a good or service.
Example:
The noise and fumes from a busy airport are negative externalities for residents living nearby, even though they don't use the airport.
Non-Excludable
A characteristic of a good where it is impossible or prohibitively costly to prevent individuals from consuming it, even if they do not pay.
Example:
Clean air is non-excludable because everyone in an area breathes it, regardless of whether they contribute to its cleanliness.
Non-Rivalrous
A characteristic of a good where one person's consumption does not diminish or prevent another person's ability to consume the same good.
Example:
Listening to a public radio broadcast is non-rivalrous because your enjoyment doesn't stop anyone else from listening.
Positive Externalities
Benefits conferred on a third party who is not involved in the production or consumption of a good or service.
Example:
When a homeowner paints their house and maintains their garden, it creates positive externalities by increasing the curb appeal and property values for the entire neighborhood.
Private Goods
Goods that are both rivalrous in consumption and excludable, meaning one person's use prevents another's, and non-payers can be prevented from using them.
Example:
A specific seat at a movie theater is a private good because only one person can occupy it, and you need a ticket to enter.
Progressive Taxes
A tax system where higher-income individuals pay a larger percentage of their income in taxes compared to lower-income individuals.
Example:
Most national income tax systems are designed as progressive taxes, with higher tax brackets for higher earners to promote income redistribution.
Proportional Taxes
A tax system where all individuals pay the same percentage of their income in taxes, regardless of their income level.
Example:
A flat tax system, where everyone pays 15% of their income, is an example of proportional taxes.
Public Goods
Goods that are both non-rivalrous and non-excludable, meaning one person's consumption does not prevent others from consuming it, and it's impossible to prevent non-payers from benefiting.
Example:
The light from a lighthouse is a public good because many ships can use its light simultaneously, and it's impossible to stop a ship from seeing it.
Regressive Taxes
A tax system where lower-income individuals pay a larger percentage of their income in taxes compared to higher-income individuals.
Example:
A sales tax is often considered a regressive tax because lower-income households tend to spend a larger proportion of their income on taxable goods, thus paying a higher percentage of their income in tax.
Rivalrous
A characteristic of a good where one person's consumption of the good diminishes or prevents another person's ability to consume it.
Example:
Eating a slice of pizza is rivalrous because once you eat it, no one else can consume that same slice.
Socially Optimal Quantity
The ideal amount of a good or service where the Marginal Social Benefit (MSB) equals the Marginal Social Cost (MSC), maximizing society's overall welfare.
Example:
For flu vaccinations, the socially optimal quantity is higher than what the free market provides because of the widespread health benefits to the entire community.
Unregulated Quantity
The amount of a good or service that the free market produces without any government intervention or policies.
Example:
Without environmental regulations, a factory might produce an unregulated quantity of goods, leading to excessive pollution.