Unit 3: Supply, Demand, Market Failures: Ch.3 Flashcards
What is Externality
that which affects those outside a market transaction
Negative or Positive
What is Marginal Cost
Cost of producing 1 more unit of good
Supply Curve
What is Marginal Benefit
Benefit of producing 1 more unit of good
What is Economic Efficiency
Perfectly Competitive
Resources allocated maximize social benefits
Does not count externalities
What is the Social Marginal Cost Curve
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
What is a Socially Efficient Price
Net social benefits are maximized when externalities are taken into account of the price
How do we Internalize Environmental Costs
Taxes
-will shift Marginal Cost Curve Up
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What is a Pigovian Tax
Tax set equal to external damage cost
What is the Polluter Pays Principle
Those responsible should pay
What is Upstream Tax
Tax imposed at the level of raw production inputs
Limits Complexity
Avoids need to estimate tax for thousands of products
What determines where tax burden falls
Elasticity of Supply and Demand
What is the Elasticity of Supply and Demand
How responsive QUANTITY supplied and demanded are to price changes
The sensitivity to price change
Elastic Supply
Increase in price = increase supplied
Inelastic Supply
Increase in price = small change in supply
Elastic Demand
Increase in Price = Decrease demand
Inelastic Demand
Increase in Price = No change in quantity demanded
What are Positive Externalities
Additional social benefit from good or service beyond market benefit
How does the demand curve change with a positive externality
Upward Shift: total social benefits of each unit
How to account for positive externality
Subsidy
What is a Subsidy
Payment to Producer to produce more
Payment to Consumer to purchase more
Cheaper to Produce
Lowers supply curve
What is Welfare Analysis
Economic tool that analyzes total costs/benefits of alternative policies to producers/consumers
What is Net Social Welfare
Consumer + Producer Surplus - Externality Damages + Benefit of Tax Revenue
Generally increases with tax
What is Optimal Pollution
pollution level that maximizes net social benefits
What is the Coase Theorem
If property rights are well defined and no transaction costs exist efficient allocation of resources will result even if externalities exist
What are the Limitations of Coase Theorem
-Free Market Environmentalism
-Free-Rider & Holdout Effects
-Issues of Equity & Distribution
What is Willingness to Pay
Maximum amount people are willing to pay for a good/service that increases well being: Demand curve
What are the Net Benefits in a Market
Sum of Consumer and Producer Surplus
