chp 5 Welfare Externalities & Public Goods

Question 1

welfare economics

Answer 1

study of how allocation of resources affects economic wellbeing

Question 2

Consumer Surplus equation/table

Answer 2

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

Question 3

consumer surplus on graph

Answer 3

the triangle under the Demand curve and above the selling price C
Cs= 0.5(base)(height) of triangle

Question 4

Producer Surplus

Answer 4

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

Question 5

Producer Surplus formula on graph

Answer 5

triangle under selling price and above supply curve
Ps=area of triangle
= 0.5(base)(height)

Question 6

What to do if Ps or Cs price changes and need to calculate new area

Answer 6

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.

Question 7

Market Efficiency

Answer 7

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

Question 8

Total Surplus Form.

Answer 8

Ts=Cs+Ps (you can only get this surplus if you buy or sell the good)

Question 9

What 3 things do free markets do

Answer 9

1. Allocate supply of goods to the buyers who WTP most
   2.Allocate demand for goods to producers who can produce at lowest cost
2. Produce quantity of goofs that maxs total surplus
   TS IS MAXED AT EQUILBRIUM

Question 10

Dead Weight Loss DWL

Answer 10

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

Question 11

Externalities def

Answer 11

impact of one persons actions on the wellbeing of a by stander

can lead to inefficient markets

Question 12

Positive Externalities

Answer 12

benefit that is enjoyed by society and not paid for by society

Question 13

Negative Ext.

Answer 13

cost suffered by society and the culprit isn’t made to pay for their damage

Question 14

Marginal Private Benefit MPB

Answer 14

max price someone would pay to consume the good (dcurve)

Question 15

Marginal Private Cost MPC

Answer 15

addition to the firms total cost of producing one or more good (scurve)

Question 16

Marginal Social Cost MSC

Answer 16

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

Question 17

Policies for Neg. Ext.

Answer 17

Government can internalize:

1. Pigovian Tax (tax on producer so they produce less)
2. Tradable Pollution permits (regulate amount firm can produce)

Question 18

Marginal Social Benefits MSB

Answer 18

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

Question 19

Policy for Pos. Ext.

Answer 19

Gov can interalize
1. subsidize production ex education (MSB=incrsQ)

Private sector can sometimes solve problems without gov interference by moral codes, contracts etc

Question 20

Coase Theorem

Answer 20

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

Question 21

Property Rights

Answer 21

The exclusive authority to determine how a resource is used whether that resource is owned by gov or by individuals

Question 22

Transaction Costs

Answer 22

Price of bargaining

Lawyer fees, translation fees

Question 23

Excludability

Answer 23

Someone can prevent you from using the good ex not paying electricity bill

Question 24

Rivalry

Answer 24

someone’s use of the good diminishes the ability of another person’s to use it ex. a car

Question 25

4 types of goods based on exclud&rivalry

Answer 25

Public, private, common, club

Question 26

Public Good

Answer 26

Non excludable, non rival ex a lighthouse

Question 27

Private Good

Answer 27

Excludable & rival ex your house

Question 28

Common Goods

Answer 28

Non excudable and rival non-toll highways

Question 29

Club Goods

Answer 29

excludable and non rival ex T.V OR NETFLIX

Question 30

Tradegy of the Commons

Answer 30

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