Key Terms
Private good
You pay all costs, you receive all benefits. Nobody else shares what you consume.
Public good
One person's consumption doesn't prevent anyone else from consuming it too. National defense is the classic example.
Externality goods (semi-public goods)
Sit between the two extremes. Benefits or costs spill over onto people who weren't part of the transaction.
Private costs
Costs borne directly by the firm.
How it works
Firms that can reduce pollution cheaply will reduce and sell excess permits. Firms that face high abatement costs will b
Real-world forms
Gasoline taxes, bottle deposit programs, pay-as-you- throw garbage fees. These are all pollution charges even if they ar
Historical example
1990 Clean Air Act amendment used marketable permits to cut sulfur dioxide emissions from power plants to half of 1980 l
Core idea
If property rights are clearly defined and transaction costs are low, private parties can negotiate a solution to extern
Classic example
Railroad sparks setting a farmer's field on fire. If the farmer has the right to an unburned field, the railroad pays to
Endangered species application
Automatic government prohibition on land use when an endangered species is found creates perverse incentives. Landowners
When to combine tools
Marketable permits can be layered with a pollution tax on any emissions not covered by a permit. The tools are not mutua
Example
Vaccination. The person who gets vaccinated captures only part of the benefit; the community captures the rest (reduced
Negative externality
Cost to society exceeds cost to the producer; external costs imposed on third parties.
Positive externality
Benefit to society exceeds benefit captured by the consumer; external benefits flow to third parties.
Social costs
Private costs plus external costs borne by society.