ECON 201 Test

positive externality

when the consumption or production of a good causes a benefit to a third party.

market equilibrium

where the supply in the market is equal to the demand in the market.

equilibrium price

where the supply of goods = demand

the optimal amount

(Marginal Cost = Marginal Benefit)

The socially optimal quantity would be

(social cost = demand meet)

Optimal Quantity

.marginal benefit=marginal cost

socially inefficient

When marginal social Cost > marginal social Benefit

negative externality

a cost that is suffered by a third party as a result of an economic transaction.

People cannot be prevented from using a good if the good is

a public good or a common resource.

If the government decides to build a new highway, the first step would be to conduct a study to determine the value of the project. The study is called a

cost-benefit analysis (pro/con)

socially-optimal level of output

marginal social benefit = social cost where the market becomes socially efficient

Neither public goods nor common resources are

excludable, but only public goods are not rival in consumption.

If the use of a common resource is not regulated,

it will be overused.

socially efficient

occurs at an output where Marginal Social Benefit = Marginal Social Cost

social well being

optimized at marginal externality Benefit

If social value is always higher than the private value, then there is a

positive externality associated with the good, and the market equilibrium quantity of the good is less than the socially optimal quantity. (If social Value > private value; postitive externality & market equlibrium < socially optimal quantity)

private cost social cost external cost

private cost- A producer's or supplier's cost of providing goods or services. social cost-considered to be the private cost plus externalities external cost- when producing or consuming a good or service imposes a cost upon a third party.

Subsidy/Subsidize

tax reduction

An externality is

the uncompensated impact of one person's actions on the well-being of a bystander.

The greatest difficulty with cost-benefit analysis of a public project is determining

the value or benefit of the project