Glossary

artificially scarce good: A public good that it is possible to exclude some people from enjoying. Also known as: club good.
causality: A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept. See also: natural experiment, correlation.
club good: See also: artificially scarce good, public good.
complements: Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other. See also: substitutes.
constrained choice problem: This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce. See also: constrained optimization problem.
constrained optimization problem: Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve).
coordination game: A game in which there are two Nash equilibria, of which one may be Pareto superior to the other. Also known as: assurance game.
correlation: A statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. It can be positive or negative (it is negative when high values of one variable are observed with low values of the other). It does not mean that there is a causal relationship between the variables. See also: causality, correlation coefficient.
correlation coefficient: A measure of how closely associated two variables are and whether they tend to take similar or dissimilar values, ranging from a value of 1 indicating that the variables take similar values (‘are positively correlated’) to –1 indicating that the variables take dissimilar variables (‘negative’ or ‘inverse’ correlation). A value of 1 or –1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of 0 indicates that knowing one of the variables provides no information about the value of the other. See also: correlation, causality.
crowding out: There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.
equilibrium: A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation.
external benefit: A positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract. Also known as: external economy. See also: external effect.
external cost: A negative external effect: that is, the negative effect of production, consumption, or other economic decisions on another person or party, which is not specified as a liability in a contract. Also known as: external diseconomy. See also: external effect.
external diseconomy: A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract. Also known as: external cost, negative externality. See also: external effect.
external economy: A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality. See also: external effect.
external effect: A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. Also known as: externality. See also: incomplete contract, market failure, external benefit, external cost.
free ride: Benefiting from the contributions of others to some cooperative project without contributing oneself.
game: A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs. See also: game theory.
game theory: A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all. See also: game.
income effect: The effect that the additional income would have if there were no change in the price or opportunity cost.
incomplete contract: A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others).
life expectancy: The average number of years of life remaining to a person at a particular age and based on a given set of age-specific death rates—generally, the mortality conditions existing in the period mentioned. Life expectancy may be determined by sex, race, or other characteristics, by using age-specific death rates for the population with that characteristic.
marginal rate of substitution (MRS): The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. See also: marginal rate of transformation.
marginal rate of transformation (MRT): The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. See also: marginal rate of substitution.
market failure: When markets allocate resources in a Pareto-inefficient way.
natural experiment: An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can plausibly be argued to be random.
non-excludable public good: A public good for which it is impossible to exclude anyone from having access. See also: artificially scarce good.
non-rival good: A good that, if available to anyone, is available to everyone at no additional cost. See also: rival good, non-excludable public good.
public good: A good for which use by one person does not reduce its availability to others. Also known as: non-rival good. See also: non-excludable public good, artificially scarce good.
reverse causality: A two-way causal relationship in which A affects B and B also affects A.
rival good: A good which, if consumed by one person, is not available to another. See also: non-rival good.
social norm: An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others.
substitutes: Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other. See also: complements.
substitution effect: The effect that is only due to changes in the price or opportunity cost, given the new level of utility.