ECON 101 2Midtermreview

There is a shortage of housing because the legal price

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Unformatted text preview: to overproduction. Externalities An externality is a cost or benefit that affects someone other than the seller or the buyer of a good. An electric utility creates an external cost by burning coal that creates acid rain. The utility doesn’t consider this cost when it chooses the quantity of power to produce. Overproduction results. Public Goods and Common Resources A public good benefits everyone and no one can be excluded from its benefits. It is in everyone’s self- interest to avoid paying for a public good (called the free- rider problem), which leads to underproduction. A common resource is owned by no one but can be used by everyone. It is in everyone’s self interest to ignore the costs of their own use of a common resource that fall on others (called tragedy of the commons). The tragedy of the commons leads to...
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