Unit 3 - Externalities and Market Issues Flashcards
consumer surplus
above equilibrium to D curve
what ____ pay going up to D curve
producer surplus
below equilibrium to S curve
real price is Qeqm for producers since the amount of tax goes to gov’t (not really producers), get to keep Qeqm + original costs represented by S curve
S curve after tax is imposed
represents to firms
-# of units willing to produce
-comes from MC curve
costs
ingredients, workers, electricity
tax revenues
PxQ = per unit tax x Q
represented by rectangle
DWL
lost gains from trade. after tax, lower Q is produced
post-tax world
person who values good/service at a higher P and producer out of luck
social surplus
CS+PS+tax revenues
why are tax revenues neutral (not a loss)?
it goes back to society
DWL is the only clear loss
burden of a tax
doesn’t always fall on person who writes the tax
usually shared between consumers + producers (not always 50-50)
why does it not matter who pays the tax?
that person isn’t necessarily the only person paying the burden of the tax
Social Security tax
6.2% paid by employees, 6.2% paid by employers (deduct $ from your paycheck on your behalf)
12.4% out of employees’ pocket –> entirely to SS
how does Social Security work?
work for 10 years (40 quarters) to qualify
will take highest 35 earning years and bring up to today’s wage value with wage index, benefits based on this (more income –> higher amount)
perfectly inelastic D
consumers bear more of burden
perfectly inelastic S or D
no DWL
externality
when the production or consumption of a good generates a cost or benefit to someone other than the consumer or producer
types of externalities
negative or positive, consumption or production
negative consumption externalities
hairspray, gasoline, cigarettes
positive consumption externalities
housing, vaccines, education
negative production externalities
oil, fish, meat
positive production externalities
honey, vaccines
positive benefits
are not externalities but are more like social benefits
externality graphs
S = marginal private cost curve (MPC)
D = marginal private benefit curve (MPB)
marginal social cost (MSC)
marginal private cost (MPC) + external cost
equilibrium D on externalities graph
where market ends up w/ 0 intervention
S=D
where private costs=private benefits
optimal Q on externalities graph
best Q for society (maximizes social surplus)
where social costs=social benefits
DWL
always points to optimum
DWL on externalities graph
if an additional barrel is made at Qoptimum, there’s only a small ____ b/c the person values it just as much
increased Q
DWL is worse
positive production externality
no external on consumption side (MPB = MSB)
ex: honey - bees pollinate surrounding farms
positive consumption externality
ex: education
social benefits are higher
D curve shows willingness to pay (private benefits)
too little education (focus on private benefits, not benefits to society)
negative consumption externality
i.e. cigarettes
once we get past Qopt, the transactional value = price level
social benefit is lowered when accounting for secondhand smoke
Gov’t intervention to get to Qopt
increases social welfare, eliminates DWL
gov’t solutions
tax = external cost in case of negative externality
subsidy = external benefit in case of a positive externality
will get us to Qopt and eliminate DWL
negative externality w/ tax
S=MPC
MSC=MPC+tax
external cost = tax
Qopt = Qtax
tax on producer when there is no externality
S=MPC=MSC
D=MPB=MSB
Qno tax = Qeqm = Qopt
creates DWL
market D
horizontal sum of individual D curves
each person buys a different amount of a certain good/service due to different BC and preferences
D curve represents willingness to pay - every consumer purchases to the point of highest value for last good/service
public good market demand curve
each person consumes same amount of good/service, but they value the last unit of good/service differently
private provision of public good
people value goods/services a different amount and split contributions according to valuation
free-rider problem
since people can benefit from contributions of others, they tend to contribute less than their real valuation of the public good but still benefit nonetheless
private provision leads to
underprovision (Q<Qopt) and may be a justification for gov’t provision
tragedy of the commons
leads to overuse of a common resource because it is non-excludable
this is really just a special kind of negative externality
solutions to tragedy of the commons
- tax (how to fix externalities?)
- regulations
- property rights (we all own a little bit of the good)
public good
non-rival, non-excludable
non-rival
no marginal cost of protecting or providing to one extra person
non-excludable
impossible to prevent anyone from consuming the good/service if they don’t pay for it
