Chapter 3 - Producers Consumers and Competitive Markets Flashcards
Why does government intervention occur?
To target a specific objective, e.g. allocation; to correct market failure.
What is economic efficiency?
The maximization of aggregate consumer and producer surplus.
What is market failure?
Situation in which an unregulated competitive market if inefficient because prices fail to provide proper signals to consumers and producers. Externality and Asymmetrical information are examples of market failure.
What is externality?
Action taken by either a producer of a consumer which affects other producers or consumers but is not accounted for by the market price.
What happens when there is no market failure?
The perfectly competitive market will achieve its maximum efficiency when there is no government intervention.
What is deadweight loss?
The loss in efficiency (total welfare) caused by the government intervention.
What is consumer surplus?
Difference between what a consumer is willing to pay for a good and the amount actually paid.
What is producer surplus?
Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.
What can consumer surplus and producer surplus be used to study?
The welfare effects of a government policy/intervention.
What is price floor?
Price control or limit on how low a price can be charged for a good.
What is specific tax?
Tax of a certain amount of money per unit sold.
What is ad valorem tax (proportional tax)?
Tax of a certain percentage of the price of the good.
