Chapter 4 Vocabulary PDF

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Chapter 4 Terminology

Dynamic efficiency Examines the allocation of resources over time (i.e., seeing if marginal benefits equal marginal costs at each point in time, over a long time horizon). It allows one to examine questions of intertemporal trade-offs such as depletion of natural and environmental resource. Economic efficiency Occurs when the economy’s resources are allocated to their best uses; an equilibrium is reached in which marginal benefits of an activity equal the marginal costs. Equity How public policy or other economic decision affects people with different levels of income or other distinguishing characteristics. External or social costs and benefits An external cost in the case of the environment is the damage of resulting from environmental impacts that are not taken into account by the firms, public agencies, or consumers whose decisions produce them. An example is waste products coming from a firm located on a river that damage downstream users of the water. External benefits accruing to people other than direct buyers or recipients of a good. Free rider A person who pays less for a good than her/his true willingness to pay, that is, someone who “underpays” relative to the benefits they receive. This occurs most often with public goods that are jointly consumed by people once provided Market failures Is a situation in which the allocation of goods and services by a free market is not efficient, often it leads to a net social welfare loss.

Net social value The total benefits from a project or policy minus the total costs where the benefits and costs are measured using all associated market and non-market values. Non-exclusion The inability to prevent someone from consuming a good or service even if they do not pay for it This is a characteristic of public goods. Non-market values** The willingness to pay for an item that does not have a well defined market and, hence, market determined price. They have to be imputed by looking at the behavior of people, using direct questioning, or other proxy methods. Non-rivalness When one person’s consumption of good does not diminish the amount available to another person to consume. This is a characteristic of public goods. An example is clean air---one person’s consumption of that air does diminish another’s. Open-access resources Resources that can be used by anyone; there is no exclusion. The atmosphere, oceans, groundwater, many surface waters, and even land can be open-access resources. Pollutee A party suffering damages caused by pollution Public goods Characterized by non-exclusion and non-rivalness--there is joint consumption of the good and, once provided, everyone can enjoy the good whether they pay for it or not. Environmental quality is a public good.

Social cost accounting Private costs plus the external (environmental) costs of production Socially efficient level of production The level of pollution where all social costs and benefits are incorporated into supply and demand curves and there equilibrium where supply equals demand. It is also where the marginal abatement costs equal the marginal damages from pollution. Also known as socially efficient scale. Static efficiency Economic efficiency at a point in time that does not take into account intertemporal tradeoffs....