Externality & Welfare Ch 2 Flashcards
efficiency
An allocation of resources is efficient if the economic surplus from those resources is maximized by that allocation.
Total Surplus
the sum of consumer and producer surplus.
Consumer surplus
difference between maximum willingness to pay and the market price.
Marginal benefits curve (Demand curve)
tells us the perceived benefits consumers obtain from consuming one additional unit.
Equilibrium price
The intersection point of a demand and supply curve at which supply and demand balance. It is a situation of economic efficiency because it maximizes the total benefits from the market—but only if there are no externalities.
Externalities
impacts that affect the well-being of those outside of a market transaction. They can be negative and positive.
Social marginal cost curve
Adding the external costs to production costs results in a total social cost curve. (Including externalities indicates that the market equilibrium is no longeroptimal. QM is too high and PM is too low. The true social optimum lies at a higher price and lower quantity produced.)
Market failure
situation where an unregulated market fails to produce an outcome that is the most beneficial to society as a whole.
Internalizing externalities
bringing the external costs into our market analysis
Pigovian tax
a per unit tax set equal to the external damage caused by an activity (For example, if tax is paid by automobile manufacturers for each car produced this will increase their marginal production costs.)
positive externality per unit, measured in dollars
The vertical distance between the market demand curve and the social marginal benefits curve
subsidy
a payment to a producer to provide an incentive for it to produce more of a good or service. In some cases, subsidies are instead paid to consumers
absence of externalities
market equilibrium is economically efficient because it maximizes the net social benefit. (A+B)
