Micro midterm
value of the product's next highest valued use
equilibrium P
If Pworld>Pdom
exports
graph if there is a tariff
graph with 2 lines under equilibrium
Market for pollution ex: tax supply is
horizontal
Qs-Qd=
how much is exported
If Pworld<Pdom
imports
In a free market the price of a good is equal to the value of the good
in its next highest-valued use
If you think the future price of a good will be high, the price today will
increase
What decreases the volume of international trade
increasing tariffs
what decreases the volume of international trade
increasing tariffs
An external cost
is a cost paid by people other than the producer or consumer trading in the market
Pigouvian Tax
is levied on a good that creates a negative externality and should be set equal to the external cost to eliminate the deadweight loss
consumer surplus
left of demand, above world supply, under equilibrium P
A tariff increases domestic production by
left side quantity difference
value of wasted time
left square
amount of the tariff which would completely eliminate imports
little bottom left triangle
dead weight loss =
little right triangle
rights triangle
lost gains from trade
external benefit =
low price-new equilibrium price
If the price increases today, the future price will be
lower
Marginal social cost =
marginal cost to sellers + external cost
value of deadweight loss by the loss of foreign trade
middle triangle
price floor example
minimum wage
price ceilings
misallocate resources because consumers who buy the product may not be the ones who value it the most
efficient level of output=
new equilibrium
If tariff equates Ptar and Pdom
no imports or government revenue
external cost=
p2-p0
social benefit
private benefit + external benefit
if tariff what is decrease in CS
quadrilateral under equilibrium (ABCD)
Protectionism
restricts trade through policies that favor domestic producers
External cost example
second hand smoke
cost equation
social cost = private cost + external cost
efficient quantity in a market
social cost equilibrium Q
total value of wasted time
square left of equilibrium
external cost
supply and demand equilibrium P
Tariff
tax on imported goods
As a result of U.S. quotas on sugar imports, all of the following are true, except:
the gains to American producers are greater than the losses to American consumers.
If the United States bans the importation of Japanese automobiles:
there will likely be more U.S. auto workers but fewer Americans working in other industries.
What is the great economic problem
to satisfy as many of our wants as possible with our scarce resources
lost CS
top triangle just left of point
DWL
triangle just left or right of equilibrium point
External benefit DWL
triangle left of Dsoc
If tariff equates Ptar and Pdom. DWL is
triangle under equilibrium point
Market for pollution ex: tradeable allowances supply is
vertical
Markets coordinate in a way that links buyers and sellers who rely primarily on
voluntary cooperation and undirected actions
left triangle
wasted resources
A $1 tariff generates government revenue of
world supply with tariff line length
if tariff what is Dead Weight Loss
B+D (bottom side triangles under equilibrium)
The proposition that private parties with clearly defined property rights and low transaction costs can resolve externalities problems on their own is called the
Coase theorem
trade quota
a quantity restriction on imported goods
In the case of an external cost, the social cost curve lies________ the supply curve.
above
Deadweight loss can be eliminated if the government
added a $10 tax per unit
Internalizing the externalities
adjust the incentives to the buyer or seller
A free market maximizes the gains from trade, the sum of consumer and producer surplus, meeting all of the following conditions except:
all buyers who are willing to pay positive prices are able to receive goods from trade.
if tariff what is increase in PS
bottom left quadrilateral (A)
lost PS
bottom triangle just left of point
externality
cost or benefit that falls on bystanders Ex: taking antibiotics
when a price ceiling is in effect
demanders cannot signal their needs to suppliers
not an effective price floor
deregulation
The text states: "The great economic problem is to arrange our limited resources to satisfy as many of our wants as possible. How does a market achieve this goal?"
The forces of demand and supply use price as a signaling device that directs resources to their highest value uses.