chp 5 Welfare Externalities & Public Goods Flashcards
welfare economics
study of how allocation of resources affects economic wellbeing
Consumer Surplus equation/table
Willingness to pay- price of good
demand curve
also called reservation price
when buyer pays less than they are willing to it is a benefit
add all net benefits of people to find consumer surplus in that particular market
consumer surplus on graph
the triangle under the Demand curve and above the selling price C
Cs= 0.5(base)(height) of triangle
Producer Surplus
amount a seller is paid for good-the sellers cost
measures benefit to sellers in that market
willingness to sell=lowest price a supplier will take to produce and sell a good
Producer Surplus formula on graph
triangle under selling price and above supply curve
Ps=area of triangle
= 0.5(base)(height)
What to do if Ps or Cs price changes and need to calculate new area
First find the area of the new rectangle/price that was added or taken away then add or subtract that area to the area you originally found for the ps or cs triangle on graph.
Market Efficiency
if allocation of resources maxs total surplus (cs+ps) it is efficient
if allocation leads to wellbeing that fairly distribuated in society it is equitable
Total Surplus Form.
Ts=Cs+Ps (you can only get this surplus if you buy or sell the good)
What 3 things do free markets do
- Allocate supply of goods to the buyers who WTP most
2.Allocate demand for goods to producers who can produce at lowest cost - Produce quantity of goofs that maxs total surplus
TS IS MAXED AT EQUILBRIUM
Dead Weight Loss DWL
A loss in total surplus when the quantity traded is less than the competitive eq. Q
DWL= surplus no one gets because Q1 is less than Q*
Can also occur if there is overproduction in market
Externalities def
impact of one persons actions on the wellbeing of a by stander
can lead to inefficient markets
Positive Externalities
benefit that is enjoyed by society and not paid for by society
Negative Ext.
cost suffered by society and the culprit isn’t made to pay for their damage
Marginal Private Benefit MPB
max price someone would pay to consume the good (dcurve)
Marginal Private Cost MPC
addition to the firms total cost of producing one or more good (scurve)
Marginal Social Cost MSC
Neg Ext.
MPC of producers plus the cost to the public adversely affected by the POLLUTION (markets produce more than socially desirable)
SCURVE SHIFTS LEFT
Policies for Neg. Ext.
Government can internalize:
- Pigovian Tax (tax on producer so they produce less)
- Tradable Pollution permits (regulate amount firm can produce)
Marginal Social Benefits MSB
Pos. Ext.
MPB to those who get vaccinated and benefit to the reset of society (markets produce less than what is socially desirable)
DCURVE SHIFTS RIGHT
Policy for Pos. Ext.
Gov can interalize
1. subsidize production ex education (MSB=incrsQ)
Private sector can sometimes solve problems without gov interference by moral codes, contracts etc
Coase Theorem
supports idea of no-gov intervention private parties can solve externality problems on own
if they bargain without cost over the allocation of resources and have property rights
Property Rights
The exclusive authority to determine how a resource is used whether that resource is owned by gov or by individuals
Transaction Costs
Price of bargaining
Lawyer fees, translation fees
Excludability
Someone can prevent you from using the good ex not paying electricity bill
Rivalry
someone’s use of the good diminishes the ability of another person’s to use it ex. a car
4 types of goods based on exclud&rivalry
Public, private, common, club
Public Good
Non excludable, non rival ex a lighthouse
Private Good
Excludable & rival ex your house
Common Goods
Non excudable and rival non-toll highways
Club Goods
excludable and non rival ex T.V OR NETFLIX
Tradegy of the Commons
Misuse or overuse of public property by individuals acting in their own best interest while ignoring the interest of the rest of the public
Gov tries to avoid this by regulating use of public resources ex some wildlife is protected
