Unit 3: Supply, Demand, Market Failures: Ch.3

Question 1

What is Externality

Answer 1

that which affects those outside a market transaction
Negative or Positive

Question 2

What is Marginal Cost

Answer 2

Cost of producing 1 more unit of good
Supply Curve

Question 3

What is Marginal Benefit

Answer 3

Benefit of producing 1 more unit of good

Question 4

What is Economic Efficiency

Answer 4

Perfectly Competitive
Resources allocated maximize social benefits
Does not count externalities

Question 5

What is the Social Marginal Cost Curve

Answer 5

Adding external costs to production costs to understand total social cost
If Social Marginal Cost is higher than marginal benefit = Society is worse off with each additional unit

Question 6

What is a Socially Efficient Price

Answer 6

Net social benefits are maximized when externalities are taken into account of the price

Question 7

How do we Internalize Environmental Costs

Answer 7

Taxes
-will shift Marginal Cost Curve Up
-

Question 8

What is a Pigovian Tax

Answer 8

Tax set equal to external damage cost

Question 9

What is the Polluter Pays Principle

Answer 9

Those responsible should pay

Question 10

What is Upstream Tax

Answer 10

Tax imposed at the level of raw production inputs
Limits Complexity
Avoids need to estimate tax for thousands of products

Question 11

What determines where tax burden falls

Answer 11

Elasticity of Supply and Demand

Question 12

What is the Elasticity of Supply and Demand

Answer 12

How responsive QUANTITY supplied and demanded are to price changes
The sensitivity to price change

Question 13

Elastic Supply

Answer 13

Increase in price = increase supplied

Question 14

Inelastic Supply

Answer 14

Increase in price = small change in supply

Question 15

Elastic Demand

Answer 15

Increase in Price = Decrease demand

Question 16

Inelastic Demand

Answer 16

Increase in Price = No change in quantity demanded

Question 17

What are Positive Externalities

Answer 17

Additional social benefit from good or service beyond market benefit

Question 18

How does the demand curve change with a positive externality

Answer 18

Upward Shift: total social benefits of each unit

Question 19

How to account for positive externality

Answer 19

Subsidy

Question 20

What is a Subsidy

Answer 20

Payment to Producer to produce more
Payment to Consumer to purchase more
Cheaper to Produce
Lowers supply curve

Question 21

What is Welfare Analysis

Answer 21

Economic tool that analyzes total costs/benefits of alternative policies to producers/consumers

Question 22

What is Net Social Welfare

Answer 22

Consumer + Producer Surplus - Externality Damages + Benefit of Tax Revenue
Generally increases with tax

Question 23

What is Optimal Pollution

Answer 23

pollution level that maximizes net social benefits

Question 24

What is the Coase Theorem

Answer 24

If property rights are well defined and no transaction costs exist efficient allocation of resources will result even if externalities exist

Question 25

What are the Limitations of Coase Theorem

Answer 25

-Free Market Environmentalism
-Free-Rider & Holdout Effects
-Issues of Equity & Distribution

Question 26

What is Willingness to Pay

Answer 26

Maximum amount people are willing to pay for a good/service that increases well being: Demand curve

Question 27

What are the Net Benefits in a Market

Answer 27

Sum of Consumer and Producer Surplus