Week 3- Supply, Demand, and Gov't policy lectures Flashcards
Demand-Side Market failures-
Affecting consumers, looking at their willingness to pay.
Supply-Side Market Failures-
Looking at producer’s willingness to supply.
Consumer surplus-
Amount buyer willing to pay for a good - amount buyer actually pay for it.
Maximum willingness to pay (MWP) - Price (P)= CS.
Producer suplus-
- Amount a seller is paid - cost of production.
Minimum Acceptable Price (MAP) - Price (P)= PS.
Productive efficiency-
Minimized production cost.
Allocative efficiency-
Output is MB=MC.
Total Surplus-
Consumer surplus + producer surplus.
Deadweight loss-
Cost to society created by market inefficiency.
Private goods-
When you have rivalry and excludability.
Rivalry-
When 1 person buy and consumes a product, it’ll no longer available to other.
Excludability-
When sellers let people who don’t pay have access to that product.
Public goods-
Gov’t services.
Non-rivalry-
You consumes something does not stop consumption of that good by others.
Non-excludability-
There’s no way of excluding 1 individual from benefit of a good. Ex: air.
2 ways for a good to be provided:
- Private philanthropy-
- Gov’t provision-
- Museums.
2. Medicaid, building roads, military.
Free rider-
Everyone including nonpayers can obtain it.
Quasi-public goods-
Goods could be produced and deliver in way that exclusion would be possible. Ex: public school.
Reallocation process-
Everything use resources.
Externality-
A third party is affected by sellers and buyers. If that 3rd party is hurt: Negative externality. If that 3rd party is benefit: Positive externality.
Negative externality-
Overproduction of output so over-allocation (spillover cost). Causes supply market failure.
Positive externality-
Underproduction of output and so under-allocation (spillover benefits). Causes demand market failure. Ex: planting flowers.
Gov’t intervention to externalities:
Direct control-
To deal w/ negative externalities, gov’t pass legislation and taxing to limit activity.
EX: Illegal to throw waste into streams.
Gov’t intervention to externalities:
Subsidies and Provisions
Subsidy to buyers- Gives people money to increase demand and quantity.
Subsidy to producers- Gives money to increase supply and quantity.
Gov’t provision- Gov’t provides money through taxing buyers and sellers.
Society’s Optimal Amount of Externality Reduction-
There’re cost to reduce pollution. Ex: put up fence and patrols