Distortions on their effects Flashcards
1
Q
P
A
market price
2
Q
MB
A
private marginal benefit (to those who demand it)
3
Q
MC
A
Private marginal cost (to those who supply it)
4
Q
SMB
A
social marginal benefit (to everybody affected)
5
Q
SMC
A
social marginal cost of an activity (to everybody affected)
6
Q
First best world
A
exactly the right amount supplied and demanded
P= MB = MC =SMB =SMC
7
Q
external benefits
A
too much is supplied because suppliers make and sell extra units for which the social costs exceed the price (EX: production that pollutes air)
SMC > P (= MB = MC = SMB)
8
Q
External benefits
A
not enough is demanded because demanders receive’ only private benefits equal to the price, not the full social benefits
