tend to be under-provided

people do not have to pay to use them

they have an incentive to free ride

firms have no incentive to provide them

the government provides public goods, using cost-benefit analysis to determine how much to provide

tend to be over-consumed

people can use common resources without paying, so they tend to overuse them

cannot prevent free riders from using

little incentive for firms to provide

Inputs used to produce goods and services

Including Labor, Land and Capital

These factors play a crucial role in the production process and are supplied by households to firms.

The supply and demand of factors of production create a separate market.

The supply of labor depends on wages and alternative opportunities.

Wages and alternative opportunities influence the decision to supply labor.

Immigration and changes in job opportunities can also impact the supply of labor.

Describes the relationship between inputs used and the output of goods.

Becomes flatter as the quantity of inputs increases.

The value of the marginal product of labor (VMPL) is the product of the marginal product of labor and the price of the output.

VMPL measures the additional benefit of hiring an additional unit of labor.

VMPL decreases as the quantity of labor increases.

Wages in the labor market adjust to balance the supply and demand for labor.

Determined by the value of the VMPL.

Changes in the supply or demand for labor will change the equilibrium wage and the corresponding value of the marginal product.

The impact of someone's actions on another person without any compensation.

can be negative or positive, depending on whether impact on bystander is adverse or beneficial.

Buyers and sellers who only think about their own interests ignore the additional costs or benefits of their actions, so the result in the market is not efficient.

Buying more of one good leaves
less income to buy other goods.

Working more hours means more income and more consumption, but less leisure time. 

Reducing saving allows more consumption today but reduces future consumption.

the rate at which A
can trade product 1 for product 2

the opportunity cost of product 1 in terms of product 2

the relative price of product 1:

P of p1 : P of p2

The ideal corrective tax = external cost

For activities with positive externalities,
ideal corrective subsidy = external benefit

Align private incentives with society’s interests

Moral codes and social sanctions

Charities

Contracts between market participants and the affected bystanders

As pollution costs rise, firms pollute less.

A tax or tradable permits system can reduce pollution by increasing the cost of polluting. When policymakers are uncertain about the demand for pollution, a permits system is more precise in achieving pollution reduction goals.