IB Economics 2.8 Market Failure - Externalities, Common Pool Resources, Public Goods, Asymmetric Information Key Definitions

A carbon tax is a Pigouvian tax levied on the carbon content of fossil fuels, charging emitters a set price for each tonne of carbon dioxide (or equivalent greenhouse gas) released. By adding the external cost of emissions to the private cost of production, it raises marginal private cost toward marginal social cost, giving firms and consumers an ongoing incentive to cut emissions and switch to cleaner alternatives.

The situation where a common pool resources are given to the control of individuals for them to manage it in a sustainable manner.

Natural resources which are available for use for everyone, but are susceptible to overuse and depletion.

Goods that are not socially desirable but are over provided by the market.

The process of increasing real per capita income while improving living standards and reducing poverty within an economy as whole.

The spillover effects on third parties, due to actions of consumer or producers.

When countries work together to solve global problems and achieve shared goals through agreements and joint actions.

Goods that are desirable by society but are under provided by the market.

Negative consumption externalities are spillover costs imposed on third parties from the consumption of a good, which are not reflected in the market price.

Negative Production Externalities are spillover costs passed on to third parties from the production of a good, which are not reflected in the market price.

Form of tax imposed on activities that generate negative externalities.

Occurs when the consumption of a good/service leaves positive spillover effects on third-parties.

When the production of a good/service has a positive spillover effects on third parties.

The level of production that achieves allocative efficiency, where the allocation of resources results in the most beneficial outcome for society as a whole, maximising social welfare.

The use of a resource at a rate which allows it to naturally regenerate, so it does not degrade or deplete.

A situation where individuals, acting in their own self-interest, overuse and degrade a shared resource, causing long-term harm to the resource and society.

A legal cap set by the government, limiting the amount of emissions that can be emitted. Each firm are provided a set of permits, which can be exchanged with other firms.