Externalities vs. Public Goods: What's the Difference for AP Micro Students?

Question

Hey AP Micro students! 👋 Ever get externalities and public goods mixed up? 🤔 You're not alone! Let's break down the key differences so you can ace your exams!

hernandez.sarah79 · Accepted Answer

📚 What are Externalities?
An externality occurs when the production or consumption of a good or service affects a third party who is not directly involved in the transaction. These effects can be either positive or negative.

🏭 Negative Externalities: These occur when the third party is negatively impacted. A classic example is pollution from a factory. The factory produces goods (benefiting the factory and consumers), but the pollution harms the environment and the health of people living nearby.
  🌻 Positive Externalities: These occur when the third party benefits. For instance, if you get vaccinated against a disease, you not only protect yourself but also reduce the risk of spreading the disease to others.

🏛️ What are Public Goods?
Public goods are non-excludable and non-rivalrous. This means that it's difficult to prevent people from using the good (non-excludable), and one person's use of the good does not diminish its availability to others (non-rivalrous).

🛡️ Non-excludable: It's hard to prevent people from using the good, even if they don't pay for it. National defense is a prime example.
  🏞️ Non-rivalrous: One person's enjoyment of the good doesn't reduce its availability to others. For example, listening to a radio broadcast doesn't prevent others from listening as well.

🆚 Externalities vs. Public Goods: The Key Differences

Feature
   Externalities
   Public Goods

Nature of Impact
   Side effect of production or consumption affecting third parties.
   Goods available to everyone.

Excludability
   Can be associated with both excludable and non-excludable goods.
   Non-excludable (difficult to prevent usage).

Rivalry
   Can be associated with both rivalrous and non-rivalrous goods.
   Non-rivalrous (one person's use doesn't diminish availability).

Market Failure
   Cause market inefficiencies because the price doesn't reflect the true social cost or benefit.
   Leads to under-provision by the market because of the free-rider problem.

Examples
   Pollution (negative), vaccinations (positive).
   National defense, public parks.

🔑 Key Takeaways

🎯 Externalities are side effects affecting third parties, while public goods are available to everyone.
  💸 Externalities create a divergence between private and social costs/benefits, whereas public goods suffer from the free-rider problem.
  📊 Both externalities and public goods can lead to market failures, requiring government intervention to correct.

Externalities vs. Public Goods: What's the Difference for AP Micro Students?

1 Answers

📚 What are Externalities?

🏛️ What are Public Goods?

🆚 Externalities vs. Public Goods: The Key Differences

🔑 Key Takeaways

Join the discussion

Feature	Externalities	Public Goods
Nature of Impact	Side effect of production or consumption affecting third parties.	Goods available to everyone.
Excludability	Can be associated with both excludable and non-excludable goods.	Non-excludable (difficult to prevent usage).
Rivalry	Can be associated with both rivalrous and non-rivalrous goods.	Non-rivalrous (one person's use doesn't diminish availability).
Market Failure	Cause market inefficiencies because the price doesn't reflect the true social cost or benefit.	Leads to under-provision by the market because of the free-rider problem.
Examples	Pollution (negative), vaccinations (positive).	National defense, public parks.