micro test 3
equal across all goods consumed and all income is spent
consumers maximize their utility when the marginal utility per dollar is
marginal utility
consumers value additional units of a good less and less
external cost (tax)
cost paid by bystanders, not consumers or buyers
private cost
cost paid by the consumer or the producer
externalities
costs/benefits that fall on the bystanders
indifference curve
curved line
as one moves down along an indifference curve, the slope of the indifference curve
decreases
as one moves down along an indifference curve, the slope of the indifference curve typically
decreases
markets producing too much output
external costs result in
the rate at which a consumer is willing to trade one good for another and remain indifferent
marginal rate of substitution is the
private cost
market cost=
slope of indifference curve
mrs=
on highest indifference curve but still on budget constraint
optimal consumption bundle is
budget constraint
straight slope. $of gb/$of ga
income effect
the change in consumption resulting from a change in real income
efficient way to reduce pollution at lower costs
tradeable allowances are an
all the costs necessary to reach an agreement
transaction costs are
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
too high; too low
when external benefits are present, the market price is ______, however when external costs are present, the market price is ______
slopes downward
when the income effect from a wage increase is greater than the substitution effect, the supply curve for labor
social surplus
consumer surplus+producer surplus+bystander surplus
private marginal benefit equals the social cost
social surplus is maximized when
Pigouvian subsidy
a subsidy on a good with external benefits
Pigouvian Tax
a tax on a good with external costs
decrease in mu and qp
an increase in price of a good leads to
consumers value additional units of a good less and less
by assuming diminishing marginal utility, we mean that
pigouvian taxes, tradeable allowances, command and control
government solutions to externality problems include
to lower ones
higher indifference curves are preferred
cross each other
indifference curves cannot
producers whose goods have external benefits
pigouvian subsidies are awarded to
social cost equals
private cost+external cost
transaction costs are low and property rights are clearly defined
the coase theorem says that private bargains can ensure an efficient market equilibrium even when externalities exist if
equates the slope of the budget constraint with the slope of the indifference curve
the consumption bundle that maximizes utility for a consumer is the bundle that
