Microeconomic Definitions

Front

What are taxes in microeconomics?

Back

Taxes are compulsory financial charges or levies imposed by a government on individuals, businesses, or goods and services to generate revenue for public expenditures. They can affect market equilibrium, consumer behavior, and producer decisions.

Front

What are subsidies?

Back

Subsidies are financial assistance provided by the government to individuals, businesses, or industries to encourage production, consumption, or economic activities that are deemed beneficial to society.

Front

What are externalities?

Back

Externalities occur when a third party is affected by a transaction between a buyer and a seller, without being directly involved in the exchange. They can be positive or negative.

Front

What are negative externalities?

Back

Negative externalities occur when an economic activity imposes costs on third parties, such as pollution from factories affecting nearby residents.

Front

What are positive externalities?

Back

Positive externalities occur when an economic activity generates benefits for third parties, such as education improving societal productivity.

Front

How do governments address externalities?

Back

Governments may intervene through taxation, subsidies, or regulation to correct market failures caused by externalities.

Front

What are external costs?

Back

External costs are costs incurred by third parties who are not directly involved in an economic transaction, often arising from negative externalities like environmental damage caused by industrial pollution.

Front

What is the Coase Theorem?

Back

The Coase Theorem posits that if property rights are well-defined and transaction costs are low, private parties can negotiate solutions to externalities on their own, leading to an efficient outcome.

Front

What is a Pigovian tax?

Back

A Pigovian tax is a tax imposed on activities that generate negative externalities, intended to correct an inefficient market outcome by being set equal to the social cost of the negative externalities.

Front

What is a public good?

Back

A public good is a good that is non-excludable and non-rivalrous, meaning that individuals cannot be effectively excluded from its use and where use by one individual does not reduce availability to others, such as national defense or clean air.