Midterm 1 (market efficiency and market failure) Flashcards
Failure to consider external costs/benefits can lead to
market failure
positive externality
the benefit a third party enjoys from a choice they did not help pay for
negative externality
the cost a third party has to pay for a choice they are not directly involved in
MBsocial
(MBprivate + MBexternal)
MCsocial
(MCprivate + MCexternal)
When positive externalities exist, the market equilibrium is inefficient because too ______ is produced, and ______ _____does not reflect the true value of what is produced.
little, market price
when negative externalities exist, the market equilibrium is inefficient because too ______ is produced and the market price is ____ _____
much, too low
when externalities exist, the government intervenes and implements ______________ to stimulate demand for a product.
+: tax credits, subsidies, other incentives
-: excise taxes, regulations, enforcement of property rights, pollution controls, etc.
private goods
rivalry and excludability
public goods
nonrivalry and nonexcludability
when a government uses tax revenue to fund public goods it prevents ____ _____
free riders
the more pollution you clean up, the smaller the _______ _______
marginal benefit
property rights
the exclusive right to determine how a resource is used
Coase Theorem: If a property right is ____________ and transaction costs are ______, resources will naturally gravitate to their _____________ use, regardless of who owns the property right.
well-defined, low, highest-valued
when externalities exist, _________ _________ may be able to _______ the market outcome _________ efficiency and economic ________.
outside intervention, improve, increasing, surplus
when economists do flip analysis of a “bad,” they evaluate:
prevention of the “bad.”
Transaction costs involve the costs in terms of
time, energy, and resources associated with searching out, negotiating, and completing a transaction.
the more prices fall, and the more consumers can buy, the greater the ________ __________.
wealth created
____________ _______ maximizes the number of trades buyers and sellers can make.
equilibrium price
deadweight loss
missing economic surplus
allocative efficiency
marginal benefit = marginal cost, total welfare is maximized
productive efficiency
least-cost production
When the government controls prices, they usually DO/DO NOT use productive or allocative efficiency
do not
Why do price ceilings reduce the amount of wealth created in markets?
Because they reduce the amount of win-win market transactions.
what creates deadweight loss?
market distortions
without taxes, the market is at a ___________ equilibrium point, and economic surplus is divided between ___________ and ___________.
competitive
consumers, producers
do CONSUMERS benefit or lose from price CEILINGS?
some benefit, some lose
do CONSUMERS benefit or lose from price FLOORS?
all lose
do PRODUCERS benefit or lose from price CEILINGS?
all lose
do PRODUCERS benefit or lose from price FLOORS?
some benefit, some lose
What welfare effect do BOTH price ceilings and floors have on society overall?
society is worse off
tax revenue formula
TR = b * h
(quantity = b)
(price = h)
CS/SP/DWL formula
(1/2) (b*h)
PPF line = ________ly efficient
productive
customer preferences/producing the goods people want most = ________ly efficient
allocative
a tax on producers does what to/on the supply curve?
shifts it up vertically
3 things that cause market failure
-monopoly market power
-externalities
-public goods
