Chapter 4 - Markets, Externalities, and Public Goods Flashcards
What is Economic Efficiency?
An index of examining how an economy functions and a criterion for judging whether it is performing as well as it might.
When is economic efficiency used?
Applied to input usage levels and to the determination of output levels
How do we identify the rate of output that is socially efficient?
By comparing the marginal willingness to pay for the extra output with the marginal opportunity costs of the output.
- if the former exceeds the latter, we would want the extra output to be produced.
How can you find the efficient level of production when looking at a MWTP vs. MC graph?
By looking at the intersection of the two curves.
When a rate of output is at the socially efficient level is as _________- as possible.
Large
Rate of Output at the Socially Efficient Level is also known as:
Total Willingness to Pay - Total Costs
Equity is tied closely with the distribution of __________ and _________ in a society.
Income, wealth
Define a Market:
An institution in which buyers and sellers of goods and services, carry out mutually agree-upon exchanges.
What is a key descriptor of the Demand Curve?
A downward slope; the higher the price, the lower the quantity demanded (vice versa)
What does the Supply Curve show?
It shows the quantity of the good that suppliers would willingly make available at different prices.
What is a key descriptor of the Supply Curve?
Upward sloping; higher prices represent greater incentives for suppliers and larger quantities are supplied.
What is the factor that affects the height & shape of a supply curve?
Production Costs
What does the Demand and Supply curves represent?
Possibilities or alternatives
At the ______________, quantity demanded equals quantity supplied.
equilibrium
What is Market Failure?
When there a substantial differences between market values and social values.
Environmental effects can create a difference between market _________ and true ____________________.
Demands, social marginal willingness to pay
Define Private Costs:
Costs that show up in the profit-and-loss statement at the end of the year.
Define External Costs:
Costs that do not show up in a firm’s profit-and-loss statement.
External costs are often more felt by __________.
The people who had no part in creating the costs / results.
Write the equation for calculating Social Costs:
Social Costs = Private Costs + External (environmental) costs
Define Open-Access Resources:
A resource or facility that is open to uncontrolled access by individuals who wish to use the resource.
What is an example of an Open-Access Resource?
An Ocean Fishery
Define an external benefit:
A benefit that accrues to somebody who is outside, or external to, the decision about consuming or producing the good or resource that causes the externality.
Define the Aggregate MWTP:
the amount of extra money a customer is willing to pay for a product or service improvement
Define Public Goods:
A type of good that inherently involves large-scale external benefits.
Provide an example of a Public Good:
Lighthouses: Once the service is made available, it immediately becomes available to all others in the vicinity.
Why are we interested in public goods in this class?
Because environmental quality is essentially a public good
What are buyers desires represented by?
The aggregate demand curve
How do you find the Aggregate Supply Curve of an Industry?
The horizontal summation of individual firms’ supply curve.
Define the Marginal Cost (MC):
The extra cost of increasing output by one unit.
