Unit 6: Market Failures and the Role of the Government

• Two Characteristics of Public Goods:

  • Nonexcludable - Everyone can use the good, even those that don't pay.
  • Nonrivalrous - when one person uses a good, it does not prevent others from using it.
• Negative Externality: A situation that results in external costs on others causing the marginal social cost to be higher than the marginal private cost
• Positive Externality: A situation that results in external benefits on others causing the marginal social benefit to be higher than the marginal private benefit
• Tragedy of the Commons: A lack of property rights causes individuals to use resources in a way that is contrary to the benefits of society (eg overfishing)
• Transfer Payments: Government payments to individuals or businesses designed to meet a specific objective rather than pay for goods or resources (eg Welfare)
• Gini Coefficient: A statistical measurement of income equality where perfect equality is 0 and perfect inequality is 1. On the graph, it is the Area A divided by the sums of areas A and B.
• Progressive Tax: Takes a larger percent of income from high income groups (takes more percent from rich people)
• Proportional Tax: Takes the same percent of income from all income groups
• Regressive Tax: Takes a larger percentage from low income groups (take more percent from poor people)