ECON 103 Lecture Notes - Lecture 10: Externality, Private Good
18 Aug 2018
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Document Summary
Chapter 5: difficult cases for the market, and the role of government external cost: to describe a situation in which the spillover effects harm third parties. These costs arise because property rights are poorly defined or imperfectly enforced. external benefit the spillover effects enhance the welfare of the third parties: public goods. Public goods have two distinguishing characteristics: nonri-valry in consumption (1) and nonexcludability (2) that making the good available to one consumer does not reduce its availability to others. (1) Means that it is impossible (or at least very costly) to exclude nonpaying customers from receiving the good. (2) Realizing they cannot be excluded, potential consumers have little incentive to pay for these goods. Instead, they have an incentive to become free riders. Free-rider: a person who receives the benefit of a good without paying for it. This will cause the good to become under- supplied. The government forces people to pay through taxes.
