External cost AND THE FREE MARKET

Free market ethos: – You get what you contribute Because you trade for what you get And the value of what you trade is defined as what you can get for it Voluntary exchange

An externality – You get something that you didn’t trade for (external benefit) – You lose something without getting something in trade for it (external cost) (Transfer payments – Getting or paying money for nothing direct)

The free market ethos doesn’t hold If there are externalities

External cost An external cost is a cost that a producer or a consumer imposes on another producer or consumer, outside of any market transaction between them. – e.g. Pollution of air or water

External benefit An external benefit is a benefit that someone gains because of someone else's action, outside of any market transaction between them. – Immunizations

Externalities and property rights An air polluter steals your air – Compared with A thief steals your car To establish and enforce either property right, you need laws, police, and courts.

A public good A public good is a good such that, if you provide it for some people, you might as well provide it for everybody. – National defense – Roads, water, and sewers (“… you didn’t build that.”) What are some health care or public health activities that are public goods? – Are emergency departments public goods?

Free rider A free rider is a person who gains an external benefit, or a benefit from a public good, without helping to pay for it. – A person to decides not to get an immunization?