Learning Outcomes
As a result of watching this programme you should be able to:
  • Know the meaning of the following terms: private cost, social cost, externality, public goods, non-excludable goods, non-rival goods.
  • Understand why markets can fail to use resources optimally in the presence of externalities.
  • Be aware of the problems for markets created by public goods.
  • Understand the free rider problem.
  • Appreciate the limits to which governments can overcome the problems associated with externalities and public goods
  • Excludability: A feature of most goods which enables suppliers to exclude people from the benefit of consumption unless they pay for those benefits. One feature of public goods such as street lighting is their non-excludability.
  • External benefit in Consumption: The benefit to society of consumption which is not obtained by the individual consumer.
  • External benefit in Production: The benefit of producing output which the firm itself does not get.
  • External cost in Consumption: The cost to society of consumption which is not borne by the individual consumer.
  • External cost in Production: The cost of production which is not borne by the producer.
  • Externalities: The costs or benefits accruing to parties external to an exchange. These, in the absence of government policy, will not be reflected in market prices.
  • Free-rider: Someone who chooses not to offer to purchase a public good because he/she thinks that his/her decision will not reduce the amount of it available for his/her con­sumption. See also Public goods.
  • Indirect tax: A tax not imposed directly upon factor incomes but on goods or services which consumers purchase. Value added tax is an example.
  • Non-rival goods: Goods for which consumers are not rivals for their consumption. For example, if one person watches the weather forecast, it does not prevent others from watching it also. See also Public goods.
  • Private cost: The cost borne by a firm in producing output. In the absence of extern­alities it will be equal to social cost. See also Social cost.
  • Public goods: Those goods which are non-rival and non-excludable and which are con­sumed equally by all. If all these features are present it is a pure public good. If one or more but not all are present they are impure public goods. See also Non-rival goods and Excludability.
  • Social cost: The cost to society of producing a given volume of output. It is equal to private cost plus any external cost or benefit. See also Private cost and External cost.
  • Subsidy: A payment by government designed to reduce the production cost to a firm of a particular product.
Last modified: Monday, February 17, 2020, 7:32 PM