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
