External cost AND THE FREE MARKET Free market

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?