chapter 4 Flashcards
market failure
The inability of a market to bring about the allocation of resources that best satisfies the wants of society
consumer surplus
the difference between the maximum price a consumer is willing to pay for a product and the actual price that they do pay
producer surplus
the difference between the actual price a producer receive and the minimum price that a consumer would have to pay the producer to make a particular unit of output available
-productive efficiency- is achieve because competition forces orange growers to use the best technologies and combinations of resources available. doing so minimizes the per-unit cost of the output produced
The production of a good in the least costly way; occurs when production takes place at the output level at which per-unit production costs are minimized
-allocative efficiency- is achieve because the correct quantity of oranges is produced relative to other goods and services.
the output of each product at which its marginal cost and marginal benefit are equal,
demand curve represents
marginal benefit
supply curve represents
marginal benefits
efficiency losses
Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss
total surplus
sum of consumer and producer surplus
externality
A cost or benefit from production or consumption that accrues to someone other than the immediate buyers and sellers of the product being produced or consumed
negative externality
A cost imposed without compensation on third parties by the production or consumption of sellers or buyers.
Example: A manufacturer dumps toxic chemicals into a river, killing fish prized by sports fishers. Also known as an external cost or a spillover cost.
positive externality
A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers.
Example: A beekeeper benefits when a neighboring farmer plants clover. Also known as an external benefit or a spillover benefit.
how do governments counter the overproduction cause by negative externalities
direct controls or pigovian taxes
direct controls
Government policies that directly constrain activities that generate negative externalities.
Examples include maximum emissions limits for factory smokestacks and laws mandating the proper disposal of toxic wastes.
pigovian tax
A tax or charge levied on the production of a product that generates negative externalities. If set correctly, the tax will precisely offset the overallocation (overproduction) generated by the negative externality.
How does the government fix the under allocation of resources caused by positive externalities
subsidy: grant given by the government
government provision: provide product for free
fact
political pressure often cause governments to reason inefficiently when attempting to correct for market failures
optimal reduction of an externality
The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.
type of market failure: asymmetric information
A situation where one party to a market transaction has more information about a product or service than the other. The result may be an under- or overallocation of resources.
moral hazard problem
The possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others
Example: A bank whose deposits are insured against losses may make riskier loans and investments
moral hazard problem
The possibility that individuals or institutions will behave more recklessly after they obtain insurance or similar contracts that shift the financial burden of bad outcomes onto others
Example: A bank whose deposits are insured against losses may make riskier loans and investments
adverse selection problem
A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs .
Example: an insurance company offering “no medical exam required” life insurance policies will attract customers who have life-threatening maladies
