All Diagrams (Still in Progress) Flashcards
1 Production Possibility Curves
Draw a PPF
4.1 Indirect Taxation
Indirect Tax Diagram analysis
1) Supply Curve: Shifts upwards from $1 to S1+tax
2) Price & Quantity: Price increases from P1 to P2 and Quantity decreases from Q1 to Q2
3) Producer Revenue: Decreases from P1AQ10 to DCQ20
4) Government Revenue: P2BCD
5) Consumer Burden: P1P2BE
6) Producer Burden: P1ECD
7) Welfare Loss: ABC
4.2 Subsidy
Subsidy Diagram Analysis
1) Supply Curve: Shifts downwards from S1 to S1+sub
2) Price & Quantity: Price decreases from P1 to P2 and quantity increases from Q1 to Q2
3) Producer Revenue: Increases from P1XQ10 to BCQ20
4) Government Cost: BCDP2
5) Consumer Savings: P1XYP2
6) Welfare Loss: CDX
4.3 Minimum Price
Minimum Price (Price Floor Diagram)
- with intervention buying, revenues for the producer increase from P1CQ10 to P2BQsO.
- This is known as intervention buying, which has a cost equal to the rectangle ABQdQs.
4.4 Maximum Price
Maxiumum Price Diagram Analysis
Implementing maximum prices or price ceilings results in a decrease in prices from P1 to P2, causing an extension of demand to Qd and a contraction of supply to Qs. This creates an excess demand (a shortage) of AB in the market.
Producers lose out considerably with lower revenue from P1CQ10 to PZAQs0 and lower producer surplus.
5.1 Externalities
Neagtive Production Externality diagram analysis
5.1 Externalities
Negative Externality in consumption diagram analysis
5.1 Externalities
Positive Externality in Consumption diagram analysis
5.1 Externalities
Positive Externality in Production diagram analysis
5.2 Merit/Demerit Goods
De-Merit Good Diagram
It is just a negative externality diagram
5.2 Merit/Demerit Goods
Merit Good Diagram Analysis
5.3 Tragedy of the Commons
Tragedy of the Commons Diagram Analysis
It’s just a negative production externality diagram
5.5 Information Failure
Information Failure Diagram (overestimating benefit of good)
- E.g. Overestimating the benefit of food supplements, cosmetic surgery
- This diagram shows effect of Over-estimating the private benefit of consumption
- Individuals may have imperfect information about their own private benefits. If they had better/fuller information on the benefits to themselves of consuming a good or service, the marginal private benefit curve would shift lower leading to a smaller equilibrium quantity
5.5 Information Failure
Information Failure Diagram (underestimating benefit of good)
- E.g. underestimating the benefit of healthy eating, giving up smoking, education
- Individuals may have imperfect information about their own private benefits. If they had better/fuller information on the benefits to themselves of consuming a good or service, the marginal private benefit curve would shift upwards leading to a greater equilibrium quantity
5.8 Monopoly Power
Monopoly Power Diagram
6.1 Indirect Tax and Market Failure
How does a carbon tax affect the market?
Indirect taxation to solve negative externality in production diagram
A carbon tax increases the costs of production for polluting firms, shifting the MPC curve upwards from MPC to MPC+tax, equal to MSC. The price increases in the market from P1 to P, with quantity decreasing from Q1 to Q, the socially optimum level of output. The externality has now been fully internalised with the price reflecting the full social cost of production, hence the polluter is now paying the full cost of their actions. The overproduction and overconsumption that existed in the market is now solved with resources allocated efficiently at Q*.
6.1 Indirect Tax and Market Failure
What is the impact of an indirect tax on consumption of cigarettes, alcohol, and sugar?
Indirect taxation to solve negative externality in consumption diagram
An indirect tax such as a cigarette, alcohol or sugar tax increases the costs of production for firms, shifting the MPC curve upwards from MPC to MPC+tax. The price increases in the market from P1 to P2 and due to the law of demand, consumption is discouraged, decreasing quantity from Q1 to Q, the socially optimum level of output. The externality has now been fully internalised with the overconsumption and overproduction issues now solved. There is no longer a misallocation of resources with resources allocated efficiently at Q.
Government revenue: P*ABC
6.1 Indirect Tax and Market Failure
What is the first disadvantage of using an indirect tax to solve market failure?
Cons/Evaluation
The demand for cigarettes, alcohol, sugar and fuel is price inelastic, meaning that as price increases, quantity decreases, but proportionately less than the price increase. This is because they are eitherm necesseities, addicitive. or there aren’t many good subsitutes available. Therefore as price increases, quantity decreases from Q1 to Q2 due to the law of demand, but proportionately less than price increase from P1 to P2. Therefore, the decrease in quantity will help to reduce the misallocation of resources but not by enough to fully solve the market failure if Q* is below Q2. Any overconsumption and overproduction problems will remain.
6.2 Subsidy and Market Failure
What is a subsidy used for in solving positive externality in consumption/merit good market failure?
A subsidy such as public transport, solar panel, vaccination, electric car, gym/leisure centre and museum subsidies will reduce the costs of production for firms shifting the MPC curve downwards from MPC to MPC+sub. The price decreases in the market from P1 to P2 and due to the law of demand, consumption is encouraged, increasing quantity from Q1 to Q, the socially optimum level of output. The under consumption and under production issues are fully solved. There is no longer a misallocation of resources with resources allocated efficiently at Q. Welfare is now maximised due to this intervention.
6.2 Subsidy and Market Failure
How does a subsidy solve positive externality in production market failure?
A subsidy such as in work training or R&D subsidies will reduce the costs of production for firms shifting the MPC curve downwards from MPC to MPC+sub, equal to MSC. The price decreases in the market from P1 to P* and quantity increases from Q1 to Q, the socially optimum level of output. The under production and under consumption issues are fully solved. There is no longer a misallocation of resources with resources allocated efficiently at Q. Welfare is now maximised due to this intervention.
6.4 Tradeable Pollution Permits
Pollution permit Diagram Analysis
- The level of permits is fixed in supply by the government at S1, a pollution cap that matches the socially optimum level of pollution at Q1*. Where demand for permits meets the supply of permits, a price of P1 is generated. Firms can then decide at this price whether to invest in green technology to reduce pollution or to buy excess permits at the market price. If the price of P1 is too low, firms will decide to buy permits in the market increasing demand for them from D1 to D2, pushing up the price from P1 to P2. For many firms the incentive will now change to investing in green technology.
- The fact that firms have this choice to reduce the cost burden on them is a large benefit compared to blanket regulation which may destroy the profitability of a firm and lead to unintended consequences of the firm shutting down or producing elsewhere in the world.
- If the scheme is successful over time with firms finding a way to efficiently become greener, the government can increase the cap and reduce the number of permits, shifting the supply curve from st to S2 and reducing quantity from 01* to Q2*, increasing the price of permits from P2 to P3, promoting an even stronger incentive to become green in production.
- In this way the socially optimum level of output can be reached solving the misallocation of resources and the overproduction issues. Allocative efficiency and welfare maximisation will result.
6.5 State Provision
State Provision Diagram Analysis
The diagram shows how resources are now allopcated at Q*, the sociallly optimum, a supply fizxed by the government with a price of 0.
6.6 Information Provision
How can negative advertising or information provision help solve de-merit good market failure?
Negative advertising or information provision in the form of TV campaigns, print advertising, changes to the school curriculum or packaging changes will help to solve de-merit good market failure where information failure is the root cause of the problem. Individual consumers who are now well informed when making decisions about smoking cigarettes for example will consume less, fully understanding how bad the product is for them shifting the MPB curve to the left from MPB to MPB+neg advertising which now equals MSB. The market will then operate at the socially optimum level of output at Q* with overconsumption and production issues solved and allocative efficiency attained.
6.6 Information Provision
How can positive advertising or information provision help solve merit good market failure?
Positive advertising or information provision in the form of TV campaigns, print advertising, changes to the school curriculum or packaging changes will help to solve merit good market failure where information failure is the root cause of the problem. Individual consumers who are now well informed when making decisions about using sun cream for example will consume more, fully understanding how good the product is for them shifting the MPB curve to the right from MPB to MPB+pos advertising which now equals MSB. The market will then operate at the socially optimum level of output at Q* with under consumption and production issues solved and allocative efficiency attained.
