Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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.
Tax incidence
The actual division of the burden of a tax between buyers and sellers in a market.
Government intervention
f this imposes price floors or price ceilings can lead to a loss of economic efficiency.
When the government imposes price floors or price ceilings, three important results occur:
• Some people win. • Some people lose. • There is a loss of economic efficiency.
Price ceiling
A legally determined maximum price that sellers may charge.
Price floor
A legally determined minimum price that sellers may receive.
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.
What Consumer Surplus and Producer Surplus Measure
Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit. Consumer surplus in a market is equal to the total benefit received by consumers minus the total amount they must pay to buy the good or service. Similarly, producer surplus measures the net benefit received by producers from participating in a market. Producer surplus in a market is equal to the total amount firms receive from consumers minus the cost of producing the good or service.
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.
Consumer surplus
The difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually 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.
Deadweight loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
