EC exam TWO - An Externality is a benefit or cost that...

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An Externality is a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service. They are often referred to as “spillovers”. They may be positive or negative – benefit or harm the third party. The presence of an externality in a free market can lead to a level of output that differs from the optimal level. Externalities cause a difference between the private costs (of the producer) And the social cost (private plus any external cost) -also between the private benefit and the social benefit. Market failure- market fails to produce efficient level of output. Property rights- to control, buy, or sell and economic resource (ownership), externalities or market failures result from incomplete property rights or from the difficulty of enforcing the rights in certain situations. Transactions Cost- the costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services. Coase Theorem- the argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities. Rivalry- the situation that occurs when one person’s consuming a unit of a good means no one else can consume it. Excludability- anyone who does not pay for a good can not consume it. Nonexcludable means it is impossible to exclude others from consuming the good, whether they have paid or not. PRIVATE GOODS- both rival and excludable. Food, clothing, haircuts, and other good and services. Public Goods- a good that is both nonrivalrous and nonexcludable. They are supplied by the government not private firms. Classic example is national defense.
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