A cost or benefit that an activity imposes on people who are not directly involved and that is not reflected in market prices.

A cost of an activity that spills onto third parties, such as pollution; markets tend to overproduce activities with negative externalities.

A benefit of an activity that spills onto third parties, such as a beautiful garden or a vaccination; markets tend to underproduce activities with positive externalities.

The total extra cost to society of one more unit of an activity, equal to the marginal private cost plus any marginal external cost.

The cost of one more unit that is borne by the producer or consumer directly involved in the activity.

The extra cost that one more unit of an activity imposes on third parties.

The total extra benefit to society of one more unit, equal to the marginal private benefit plus any marginal external benefit.

The extra benefit that one more unit of an activity confers on third parties.

The quantity of an activity, such as pollution, at which marginal social benefit equals marginal social cost.

The idea that when property rights are clearly defined and bargaining costs are low, private parties can negotiate to internalize externalities without government intervention.

The costs of making a deal; when they are high, private bargaining to resolve externalities tends to break down.

Taking the external costs or benefits of an action into account so that decision-makers face the full social cost or benefit.

Rules that directly limit pollution or mandate specific technologies; economists view them as usually less efficient than market-based approaches.

A tax on pollution or another negative externality; the optimal tax equals the marginal external cost at the socially optimal quantity.

Licenses to emit a limited amount of pollution that firms can buy and sell, meeting a pollution target at the lowest overall cost.

A payment designed to encourage an activity with a positive externality; the optimal subsidy equals the marginal external benefit.

An external benefit that arises when one firm's or person's knowledge and innovation raise the productivity of others.

A situation in which a good becomes more valuable to each user as more people use it, common in communications and technology goods.

A good is excludable if people can be prevented from consuming it unless they pay for it.

A good is rival in consumption if one person's use of it reduces the amount available for others.

A good that is both excludable and rival in consumption; free markets supply private goods efficiently.

When a good is nonexcludable, people can enjoy it without paying, so the market provides too little of it.

A good that is both nonexcludable and nonrival in consumption, such as national defense, that usually must be provided by the government.

Equal to the sum of every consumer's marginal private benefit, because everyone can enjoy the same unit at the same time.

The quantity at which the summed marginal social benefit equals the marginal cost of providing it.

A method governments use to decide how much of a public good to provide; it is hard because people have an incentive to overstate how much they value the good.

A good that is rival in consumption but nonexcludable, such as ocean fish, that tends to be overused.

The depletion of a common resource that occurs because each user ignores the cost their use imposes on everyone else; remedies include Pigouvian taxes, tradable licenses, and assigning property rights.

A good that is excludable but nonrival, such as pay-per-view content; the efficient price is zero, so any positive price leads to inefficiently low consumption.

Laws that promote competition by preventing monopolization and collusion.

The first major U.S. antitrust laws, which banned monopolization and anticompetitive practices and created the Federal Trade Commission.

Setting a regulated monopoly's price equal to its marginal cost, the efficient price, though it can leave the firm with losses.

Setting a regulated monopoly's price equal to its average total cost, allowing the firm to break even.

The income level below which a household is officially counted as poor; it is adjusted for the cost of living but not the standard of living.

The percentage of the population with income below the poverty threshold.

Median household income, the middle of the distribution, better represents a typical household than mean income, which is pulled upward by a few very high earners.

A single number summarizing income inequality based on how unevenly income is spread across the population, with higher values meaning more inequality.

Government aid targeted to people whose income falls below a set level.

Aid provided as goods or services rather than cash, such as Medicare and Medicaid.

A program that supplements the incomes of low earners instead of taxing them, such as the Earned Income Tax Credit.

Government programs such as Social Security and unemployment insurance that protect people against economic hardship; Social Security is the largest U.S. welfare program and has sharply reduced poverty among the elderly.