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Public Goods, Externalities, and the Role of Government Rapid Review for AP Economics

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By — McGraw-Hill Professional
Updated on Mar 2, 2011

More in-depth study guides for these concepts can be found at:

Private goods:goods that are both rival and excludable. Only one person can consume the good at a time and consumers who do not pay for the good are excluded from the consumption. Examples: a tube of toothpaste, an airline ticket.

Public goods:goods that are both nonrival and nonexcludable. One person's consumption does not prevent another from also consuming the good and if it is provided to some, it is necessarily provided to all, even if they do not pay for the good. Examples: local police services, national defense.

Free-rider problem:in the case of a public good, some members of the community know that they can consume the public good while others provide for it. This results in a lack of private funding for the good and requires that the government provide it.

Spillover benefits:additional benefits to society, not captured by the market demand curve from the production of a good, result in a price that is too high and a market quantity that is too low. Resources are underallocated to the production of this good.

Positive externality:exists when the production of a good creates utility (the spillover benefits) for third parties not directly involved in the consumption or production of the good.

Spillover costs:additional costs to society, not captured by the market supply curve from the production of a good, result in a price that is too low and market quantity that is too high. Resources are overallocated to the production of this good.

Negative externality:exists when the production of a good imposes disutility (the spillover costs) upon third parties not directly involved in the consumption or production of the good.

Egalitarianism:the philosophy that all citizens should receive an equal share of the economic resources.

Marginal Productivity Theory:the philosophy that a citizen should receive a share of economic resources proportional to the marginal revenue product of his or her productivity.

Marginal tax rate:the rate paid on the last dollar earned. This is found by taking the ratio of the change in taxes divided by the change in income.

Average tax rate:the proportion of total income paid to taxes. It is calculated by dividing the total taxes owed by the total taxable income.

Progressive tax:the proportion of income paid in taxes rises as income rises. An example is the personal income tax.

Tax bracket:a range of income on which a given marginal tax rate is applied.

Regressive tax:the proportion of income paid in taxes decreases as income rises. An example is a sales tax.

Proportional tax:a constant proportion of income is paid in taxes no matter the level of income. An example is a "flat tax" or the corporate income tax.

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