ECON 4

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externalities

a cost or benefit accruing to a third party external to the transaction

externalities concerning tax shift supply to the left

calculate externalities by the distance between those two supply curves

government intervention

correct negative externalities through direct control or specific taxes correct positive externalities through subsidies and government provision

government role in the economy

correcting externalities, officials must correctly identify the existence and cause principle agenda problem: elected people wont do as they said

cost-benefit analysis

cost: resources diverted from private good production or that will not be produced benefit: extra satisfaction from the output of more public goods

supply failure

firm does not pay the full cost of production external costs are not reflected in the supply

demand failure

impossible to charge consumer their willingness to pay, some can enjoy without paying

information failures

inadequate buyer information about sellers (solution: inspections, warrantees, franchising) inadequate seller info about buyer - moral hazard: change in behavior after purchase, reckless driver - adverse selection: buyer has more information then seller, sick person seeking insurance (solution: credit bureaus, safe-drive discounts)

market failures

market fails to produce the right amount of the product, over or under allocated resources

government intervention as implicit taxation

price controls can be viewed as a combination of tax and subsidy

private goods

produced in the market by firms, offered for sale characteristics: rivalry, excludability

consumer surplus (combination with consumer surplus maximized at market equilibrium)

product value from buying - price below the demand curve above the price area of the green triangle CS = 1/2 (P * Q)

elastic

products rarely used daily big change in the demand curve

inelastic

products used on a daily basis slight change between the quantity demanded and supplied such as food low prices decrease total revenue

public goods

provided by government, offered for free characteristics: non-rivalry, non-excludability, free-rider problem

lost of surplus

small triangle area left after change in price

efficiently functioning markets

supply must demonstrate the cost of production demand must show the consumers full willingness to pay

deadweight loss caused by a draft from price floor to ceiling

surplus transferred to the government (triangle under the original equilibrium dwl = triangle on the left of the equilibrium

price floor - demand (surplus)

tax on consumers and a subsidy for producers that transfer consumer surplus to producers increases producer surplus

price ceiling - with forced supply (shortage)

tax on producers or when wage offered is below the equilibrium and quantity supplied is below the quantity demanded increases consumer surplus

positive externalities (benefits)

too little is produces, demand-side market failures underproduction and under-allocation of resources gov. correction: subsidy to producers or consumers, government provision, private bargaining

negative externalities (costs)

too much is produces, supply side market failures overproduction of output and overallocation of resources gov. correction by: tax on producers, direct control, private bargaining

producer surplus (combination with consumer surplus maximized at market equilibrium)

value the producer sells the product - cost of producing above the supply curve below the price the producer receives area of the red triangle PS = 1/2 (P * Q)


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