Chapter 5 Flashcards
welfare economics
the branch of microeconomics that seeks to estimate the social welfare of different scenarios in order to determine how to increase net social benefits
social welfare
total benefits to society minus total costs, or total net benefits
third-party effects
impacts of an economic transaction on those not involved in the transaction, such as the health effects of pollution
maximum willingness to pay (WTP)
the maximum amount that a rational consumer will pay for a particular product. In welfare economics, consumers’ maximum WTP represents the total benefits that they expect to obtain from a product, expressed in monetary terms
consumer surplus
the net benefits obtained from a purchase, equal to the difference between a consumer’s maximum willingness to pay and the price
marginal change
a change of one unit (either an increase or a decrease)
marginal benefit (for consumers)
the benefit of consuming one additional unit of something
marginal benefits curve
a curve showing the additional benefit from each unit consumed. Another name for a demand curve, as applied to welfare economics
net benefits
benefits minus any costs. Consumer surplus is a measure of net benefits because it is equal to the difference between the maximum willingness to pay and price
aggregate (of market) benefits
the benefits to all consumers in a market
aggregate (or market) consumer surplus
the difference between aggregate costs and aggregate benefits, or net benefits obtained by all consumers in a market. On a supply-and-demand graph, it is equal to the area under a demand curve but above the price
producer surplus
the net benefits that producers receive from selling products, equal to the difference between the selling price and the marginal costs
marginal cost
the cost of producing one additional unit of something
aggregate (or market) producer surplus
the net benefit (profits) obtained by all producers in a market. On a supply-and-demand graph, it is the area below price but above the supply curve
social efficiency (in welfare economics)
an allocation of resources that maximizes the net benefits to society
