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Tragedy of the Commons

A parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole

Cost-Benefit Analysis

A study that compares the costs and benefits to society of providing a public good


A person who recieves the benefit of a good but avoids paying for it

Common Resources

Goods that are rival in consumption but not excludable

Public Goods

Goods that are neither excludable nor rival in consumption

Private Goods

Goods that are both excludable and rival in consumption

Rivalry in Consumption

The property of a good whereby one person's use diminishes other people's use


The property of a good whereby a person can be prevented from using it

Corrective Tax

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

Transaction Costs

The costs that parties incur in the process of agreeing to and following through on a bargain

Coase Theorem

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

Internalizing the Externality

Altering incentives so that people take account of the external effects of their actions


The uncompensated impact of one person's actions on the well-being of a bystander


A tax on goods produced abroad and sold domestically

World Price

The price of a good that prevails in the world market for that good

Deadweight Loss

The fall in total surplus that results from a market distortion, such as a tax

Tax Revenue

Area of rectangle between supply and demand curves

Height of rectangle

size of the tax, T

Width of rectangle

quantity of good sold, Q

Consumer surplus

Area between demand curve and price

Producer surplus

Area between supply curve and price

Price paid by buyers rises

Consumer surplus equals the area below demand curve and above the buyers price

Price recieved by sellers falls

Producer surplus eqauls area above supply curve and below sellers price

Deadweight loss is larger

when the supply curve is more elastic

When supply is inelastic

deadweight loss of a tax is small

When supply is elastic

deadweight loss of a tax is large

When demand is inelastic

deadweight loss is large

When demand is elastic

deadweight loss is small

Laffer's Argument

Lower taxes raise tax revenue

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