unit 5 + everything Flashcards
short run has
at least one fixed input
what is happening to the short runs returns to labor
increasing or diminishing
what happens to MC when short run returns are increasing
MC is falling
what happens to MC when short run returns are diminishing
MC is rising
are returns to scale relevant in the short run
no
what happens to LRATC curve in the long run if there is increasing return to scale
LRATC falling
what happens to LRATC curve in the long run if there is decreasing return to scale
LRATC rising
characteristics for monopolistic competition
- price makers
- Demand does not equal MR
- low barriers
- zero economic profit in long run
- differentiated products.
if in perfect comp and monopolistically competitive, of the firm is making profit they are in the
short run because in the long run they have zero profits
what happens when firms enter the market in long run
- profits become zero
- does not shift ATC but shifts Demand down because more firms entering means more substitutes
positive externality
generates benefits for others not involved
- good but still lead to market failure
negative externality
impose costs on others not involved
what are externality’s
a side effect on a bystander whose interests aren’t fully taken into account
- lead to market failure, producing inefficient outcomes that aren’t in society’s best interest
marginal private cost
the cost to a firm of producing one extra unit
Marginal social cost
the cost that society pays as a result of the production of additional units or utilization of a good or service
Marginal private benefit
refers to the extra gains that buyers enjoy from each unit they purchase
marginal social benefit
the change in benefits associated with the consumption of an additional unit of a good or service to society
what is the socially optimal quantity
the quantity that’s most efficient for society as a whole, taking account of all the costs and all the benefits, whether they accrue to buyers, sellers, or bystanders
profit maximizing point in externalities is where
MSC = MSB
how does the government solve negative externalities
by taxation, regulation, and stronger environmental policies
how does the government solve positive externalities
by subsidizing goods
characteristics of a public good
- non-excludable
- shared consumption (non-rival)
why is there no profit in public goods for firms
the free rider problem
what is the free rider problem
when someone enjoys the benefits of something without contributing to its production
what is a rival good and an example
a good that gets used up as it is consumed, example is cookie
what is a non rival good and an example
A good that can be consumed or possessed by multiple users
- basically countless consumers can consume the product at the same time
- music streaming
what is the MC of production for non rival goods and why
0 because you can have countless people enjoying the good at the same time
what is an excludable good and example
when its possible to prevent people from enjoying a good if they haven’t paid for it
-concerts
what are non excludable goods and example
goods that can be enjoyed without paying for them
-fireworks
why is free rider a problem
- causes goods to be underproduced, demand would be very low because people don’t have the incentive to purchase the good if they can enjoy it without paying for it
characteristics of a private good + examples
- rival
- excludable
- phone
what is true in a positive externality
MSB>MPB
if the cost of the private is greater then the benefit of the social is
also greater
taxes designed to reduce external costs are called
Pigouvian taxes
what external benefit occurs when knowledge is spread among firms and individuals
technology spillover
private benefits are
benefits that directly affect those who purchase and use a good
external benefits are
the benefits that another person who isn’t the buyer or seller gets
what is a payment designed to encourage purchases and activities that yield external benefits
pigouvian subsidies
MSB=
MPB + MEB
an efficient pigouvian subsidy is equal to the goods
marginal external benefit
if MSB>MPB the government should tax or subsidize
subsidize
if MSC > MPC the gov should tax or subsidize
a per unit tax
what does eliminating deadweight loss mean
when you have to alter the incentives of producers to produce a good
why do lump sum taxes not eliminate DWL
they have no effect on MC, only on ATC
so they have no effect on a firms decision to produce
common resources are
rival and non excludable
free riding can occur if a good is
non excludable and non rival
what is the coase theorem in the presence of external costs in production
under certain conditions, private parties can arrive at the efficient solution without government involvement.
in a positive externality what are the market equillirbium and socially optimal quantity like
market equilibrium < socially optimal
thus subsidize to fix it
in a negative externality, what are the market equilibrium and socially optimal quantity like
market equilibrium > socially optimal
thus taxation or regulate to fix it
what happens in a per unit tax for externalities
MC shifts left
what happens in a lump sum tax
ATC shifts upward
what happens in a per unit subsidy
MC shifts right
what happens in a lump sum subsidy
ATC shifts down
What type of regulations can the government do to fix externalities
quotas, price ceilings and price floors, and restrictions on production
what is tragedy of commons
When a good is non excludable and occurs when individuals overuse a shared resource for personal gain, leading to depletion
ex. no one can be excluded from fishing for tuna, but they are rival — for every tuna caught, there is one less for everyone else
what are the identification steps for an externality
- Production of consumption
- negative or positive
- DWL always pointed towards socially optimal
a production externality shifts what curve
S=MSC=MPC
a consumption externality shifts what curve
D=MPB=MSB
how do you find the wage a factor market would pay at
where MRC/MFC=MRP DOWN to the supply curve
what does it mean if the Lorenz curve to bow outward
the distribution of the country’s income has become more unequal
sales tax are an example of what type of tax
regressive tax because they tax a larger income percentage from the poor than the rich
what does a lower gini coefficient mean
more equal income distribution
what does a higher gini coefficient mean
larger tax gap between the rich and poor
what does a progressive tax do
decreases the gap between rich and poor and decreases the country’s gini coefficient, making income distribution more equal
taxes are higher % on people earning a higher income (reduces income inequality)
lower tax rate on low-income earners and a higher tax rate on those with a higher income.
what does rational ignorance mean
intentionally choosing to remain uninformed on a topic because the cost of acquiring the information is greater than the estimated potential benefits
where is the profit maximizing quantity for an unregulated monopolist
what does a per unit tax look like on a monopolist graph
MC shifts up
what shifts a ppc graph outward
Increases in the quantity or quality of resources
what is the effect of an outward PPC shift
makes it possible to produce greater quantities of both goods.
what shifts the PPC inward
Decreases in the quantity or quality of resources
what is the effect of an inward PPC shift
decreases the possible production of both goods.
when stating how you know what type of externality it is what should you say
Positive: MSB>MPB
Negative: MSC>MPC
where do you put a price ceiling on a monopolistic competition
where D = MC, horizontal lines that passes through that point
the ceiling become the MR curve
what effect does a price ceiling on monopolistic competition have on price and quantity
price and qunaityt decrease
what effect does a price floor have on a monopsony
wages and workers go up
what does a regressive tax do
taxes are lower % on people earning a higher income (increases income inequality)
what effect does world price have on total economic surplus
increases
what does a quota do
places a limit on the amount of good that can be imported
supply shifts right
what effect does a quota have on total economic surplus
quotas limit trade, decrease economic surplus, and create deadweight loss
what does a tariff do
a tax on imports
what effect does a tariff have on total economic surplus
tariffs decrease trade, decrease economic surplus, and create deadweight loss
