Glossary
Commons Goods
Goods that are non-excludable but rival in consumption, often leading to overuse and depletion.
Example:
Fish in the open ocean are commons goods because anyone can fish (non-excludable), but each fish caught means one less for others (rival).
Free-Rider Problem
Occurs when individuals consume a public good without paying for it, relying on others to bear the cost, due to the good's non-excludable nature.
Example:
If a neighborhood funds a fireworks display, someone who watches from their backyard without contributing is a free-rider.
Low-Congestion Goods (Club Goods)
Goods that are excludable but non-rival in consumption, often provided by private entities that can charge for access.
Example:
A subscription to a streaming service like Netflix is a club good; you pay to be included, but your watching a show doesn't stop others from watching it simultaneously.
Marginal Social Benefit (MSB)
The additional benefit that society as a whole receives from consuming one more unit of a good or service.
Example:
When a new public park is built, the marginal social benefit includes the added recreational value, improved air quality, and increased property values for nearby residents.
Marginal Social Cost (MSC)
The additional cost that society as a whole incurs from producing one more unit of a good or service.
Example:
The marginal social cost of building an additional highway lane includes not only the construction expenses but also the environmental impact and potential noise pollution for nearby communities.
Market Failure
A situation where the free market does not allocate resources efficiently, leading to an outcome that is not socially optimal.
Example:
Pollution is a classic example of market failure because the market doesn't account for the external costs imposed on society.
Mixed Goods
Goods that satisfy only one of the two criteria (either excludable or rival) for public goods, and can be provided by either the public or private sector.
Example:
A toll road that is not congested is a mixed good; it's excludable (you pay the toll) but non-rival (your driving doesn't affect others' ability to drive on it until it gets crowded).
Non-Excludable
A characteristic of a good where it is impossible or prohibitively costly to prevent individuals from consuming it, even if they don't pay.
Example:
Once a lighthouse is built, it's non-excludable because any ship in the vicinity can benefit from its light, regardless of whether they paid for it.
Non-Rivalry
A characteristic of a good where one person's consumption does not diminish the availability or benefit of the good for others.
Example:
Listening to a public radio broadcast is non-rivalry because your enjoyment doesn't prevent anyone else from tuning in and enjoying it too.
Optimal Production (of Public Goods)
The level of public good provision where the additional benefit to society from one more unit equals the additional cost to society of producing that unit.
Example:
A city determines the optimal production of streetlights by ensuring the added safety and visibility from each new light is worth its installation and maintenance cost.
Private Goods
Goods that are both excludable and rival in consumption, meaning individuals can be prevented from using them, and one person's use reduces another's ability to use them.
Example:
A slice of pizza is a private good because the pizzeria can exclude you if you don't pay, and once you eat it, no one else can.
Private Sector
The part of the economy composed of individuals and firms that are not controlled by the government, where economic decisions are made by consumers and firms.
Example:
A local bakery operating for profit is part of the private sector, responding to consumer demand for bread and pastries.
Public Goods
Goods provided by the government because the free market fails to produce them efficiently, characterized by being non-excludable and non-rival.
Example:
National defense is a public good because protecting one citizen doesn't reduce protection for another, and you can't exclude anyone from being defended.
Public Sector
The part of the economy controlled by the government, responsible for providing public goods and services.
Example:
The Department of Education, which oversees public schools, is a key component of the public sector.
Tragedy of the Commons
An economic problem where individuals, acting independently and rationally according to their self-interest, deplete a shared, rival, and non-excludable resource, even when it is not in anyone's long-term interest.
Example:
Overfishing in international waters, leading to declining fish populations, is a classic example of the tragedy of the commons.