chapter 7: welfare economics Flashcards
what is positive analysis?
describing what IS happening, explaining why, or predicting what will happen
what is going to happen if we adopt this policy?
what is normative analysis?
describe what should happen, which involves value judgements
which is the better outcome, and what policy should the government adopt
what is economic efficiency?
an outcome is more economically efficient if it yields more economic surplus
what is efficient outcome?
the efficient outcome yields the largest possible economic surplus
hold the potential to make everyone better off
what is utility?
level of satisfaction/ happiness
what is equity?
a measure of fairness. an outcome yields greater equity if it results in a fairer distribution of economic benefits
what is a pareto improvement?
a change which makes at least one party or economic agent better off and makes no parties or economic agents worse off
what is a potential pareto improvement?
a change where the parties that benefit from the change could compensate parties made worse off from the change so that at least one party is better off and no parties are worse off
what do pareto and potential pareto improvements result in?
increased surplus
what is consumer surplus?
the economic surplus you get from buying something
describes the gain from buying something at a price below the highest price you were willing to pay
what is the formula for consumer surplus?
consumer surplus = marginal benefit - price
area below demand curve and above price
what is the rational rule for buyers?
you should keep buying something until the marginal benefit of that last unit is equal to the price of that unit
what is producer surplus?
the economic surplus you get from selling something
describes the gain from selling something at a price above the MC you incur from producing that good or service
what is the formula for producer surplus?
producer surplus = price - MC
area under price above supply
what is the rational rule for sellers?
keep selling until the MC = P
what is voluntary exchange?
buyers and sellers exchange money for goods only if they both want to
does not guarantee that buyers and sellers share equally in the gains from trade
what is economic surplus?
economic surplus generated by a transaction is the sum of the consumer surplus enjoyed by the buyer and the producer surplus enjoyed by the seller
also called the total surplus
what is the formula for total surplus?
TS = CS + PS
what is efficient production?
producing a given quantity of output at the lowest possible cost
requires producing each unit at the lowest MC
what is efficient allocation?
allocating goods to create the largest economic surplus
requires that each good goes to the person who will get the highest marginal benefit from it
what is efficient quantity?
the quantity that produces the largest possible economic surplus
what is the rational rule for markets?
produce more of a good if its marginal benefit is great than (or equal to) the marginal cost
what are the five main sources of market failure?
- market power
- externalities
- information problems
- irrationality
- government regulations
what is an externality?
externalities create side effects
arise whenever the choices that buyers and sellers make side effects on others
