Microeconomics Economic Efficiency

Externality

A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service.

Public good

A good that is both non-rival and non-excludable.

Private good

A good that is both rival and excludable.

Common resource

A good that is rival but not excludable.

Price ceiling

A legally determined maximum price that sellers may charge.

Price floor

A legally determined minimum price that sellers may receive.

Black market

A market in which buying and selling take place at prices that violate government price regulations.

Economic efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.

Elasticity

A measure of how much one economic variable responds to changes in another economic variable.

Income elasticity of demand

A measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.

Command-and-control approach

A policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

Market failure

A situation in which the market fails to produce the efficient level of output.

Free riding

Benefiting from a good without paying for it.

Elastic demand

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is greater than one in absolute value.

Inelastic demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than one in absolute value.

Unit-elastic demand

Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to one in absolute value.

Pigovian taxes and subsidies

Government taxes and subsidies intended to bring about an efficient level of output in the presence of externalities.

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market.

Marginal benefit

The additional benefit to a consumer from consuming one more unit of a good or service.

Marginal cost

The additional cost to a firm of producing one more unit of a good or service.

Coase theorem

The argument of economist Ronald Coase that if transactions costs are low, private bargaining will result in an efficient solution to the problem of externalities.

Private benefit

The benefit received by the consumer of a good or service.

Perfectly inelastic demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.

Perfectly elastic demand

The case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity.

Private cost

The cost borne by the producer of a good or service.

Transactions costs

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

Consumer surplus

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.

Producer surplus

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.

Cross-price elasticity of demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Deadweight loss

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Price elasticity of demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Price elasticity of supply

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product's price.

Property rights

The rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it.

Excludability

The situation in which anyone who does not pay for a good cannot consume it.

Rivalry

The situation that occurs when one person consuming a unit of a good means no one else can consume it.

Economic surplus

The sum of consumer surplus and producer surplus.

Tragedy of the commons

The tendency for a common resource to be overused.

Total revenue

The total amount of funds a seller receives from selling a good or service, calculated by multiplying price per unit by the number of units sold.

Social benefit

The total benefit from consuming a good or service, including both the private benefit and any external benefit.

Social cost

The total cost of producing a good or service, including both the private cost and any external cost.