Eco Chapter 4

productive efficiency

achieved because competitive forces producers to use best technologies and resources available.

allocative efficiency

correct quantity is produced relative to other goods and services

nonexcludability

no effective way of excluding individuals from benefit of the good once it exists

public goods are distinguished by

nonrivalry and non excludability

private goods are distinguished by

rivalry and excludability

excludability

sellers can keep people who do not pay for a product from obtaining its benefits

example of consumer surplus

If Ted is willing to pay 1.25 for an apple but only .50 then he receives a consumer surplus of .75

consumer surplus and price are _________ related

Inversely (negatively) given demand curve, higher prices reduce surplus, lower prices increase.

example of producer surplus

Leah is apple producer, her minimum acceptable price is the lowest price someone could pay here so that she would just break even

allocative efficiency occurs at market equilibrium quantity where 3 conditions exist

MB=MC, maximum willingness to pay=minimum acceptable price, and total surplus (sum of consumer and producer surplus) is at a maximum

intersection of demand and supply curves at the equilibrium output indicate that

MC=MB

how does government deal with positive externalities?

Subsidies on producers and/or consumers, private bargaining, government provision

There is a __________ relationship between equilibrium price and amount of producer surplus

direct (positive)

cost benefit analysis

comparison of marginal cost and marginal benefit

positive externalities cause _______ side market failures

demand

demand side market failures

demand curves do not reflect consumers full willingness to pay for a good or service

producer surplus

difference between actual price a producer receives and minimal acceptable price that consumer would have to pay producer to make a particular output available

consumer surplus

difference between maximum price a consumer is willing to pay for a product and the actual price they do pay

size of producer surplus on any particular unit will be the

difference between the market price the producer actually receives and minimum acceptable price.

quasi public goods

education, streets, police, libraries, museums, etc.

private good

goods offered for sale in shops, stores, and on internet

externality

occurs when some of the costs or benefits of the good spill over to someone other than immediate buyer or seller

free rider problem

once producer has provided public good, everyone even non payers get the benefit

nonrivalry

one person's consumption of a good does not preclude others. ex is national defense or streetlights

example of demand side market failure

outdoor firework display. Cannot charge consumers for outdoor display because no way to separate paying from non-paying. Therefore, firms are unwilling to produce because they cannot make enough revenue to cover production costs

what type of production is associated with negative externalities?

overproduction and overallocation of resources.

what is a subsidy to a producer?

payment from the government to decrease a producers cost in order to encourage more output of a product

efficiency losses

reductions of combined consumer and producer surplus- result of over and under production.

positive externality

spillover benefit

negative externality

spillover costs.

negative externalities cause _______ side market failures

supply

supply side market failures

supply curves do not reflect full cost of producing good or service

how does government deal with negative externalities?

taxes, legislation, private bargaining,

Which way does the demand curve shift when positive externalities occur?

to the left

which way does the supply curve shift when negative externalities occur?

to the right (below) where they would be. total costs exceeds benefits

what type of production is associated with positive externalities?

underproduction and under allocation of resources

rivalry

when one person buys and consumes a product, it is not available for another to buy and consume