How markets work and how they fail Flashcards
What are fixed costs?
Independent of the product volume
Variable costs
Costs dependent on the product volume
What are variable marginal costs (for a single company)? Explain and draw graph
The extra costs a company faces when producing one more unit of a product, with only the variable costs changing (like materials, labor, or energy)
E.g. if a company makes one more item, the cost of raw materials or additional workers time would be the variable marginal cost.
What is Marginal revenue? Draw the graph for marginal revenue and explain
The additional revenue when one more unit of the product is sold
MR- graph (se häftet)
What is the optimal production level? Draw graph and explain
Marginal revenue- Variable Marginal Cost = Optimal production level
It is profitable for the single company to produce a quantity up to Qm, which would be the optimal quantity.
- This since the profit is maximized
What is Marginal Net Private Benefits? Why does it slope downwards?
MNPB, also known as Marginal net profit.
- The extra profit a company gets from producing one or more unit of a product after considering the costs
- Why it slopes downwards? As more units are produced, resources like labor or materials may become less efficient
- This means that the additional profit from each new unit is smaller than the one before
What is External marginal cost?
MEC (Marginal External Cost)
- The cost related to pollution. Is the extra harm to the environment from making or using one more unit of something.
For example, if a factory makes more products and causes more pollution, the damage from that extra pollution is the MEC.
Pollution is accumulated leading to a linear MEC-curve
How do you determine the environmental optimal quantity?
Combine MNPB and MEC, and find the equilibrium Qs, which is a quantity where the social costs and benefits are balanced, taking externalities into account.
What is Qm?
The quantity of emissions that would occur in a free market, where environmental costs are not taken into account
Why can it be environmental beneficial to introduce a pollution tax?
The tax forces companies to pay for the external costs they cause with each units produced. That is why the tax level is placed at the MEC at Qs. This is to make companies stop producing at Qs
Who pays the pollution tax?
The tax is usually payed by both customer and producer
