Econ 201 Unit 5,6,7

How is DWL measured

1/2 (length*width)

When Price Ceiling are Effective/ Ineffective?

Binding= shortage Non-binding= no change Price Ceiling= lower price and quantity Shortage= non-efficient, excess Consumers win/lose: price is lower (win), quantity is lower (lose) Producers lose: price is lower, quantity is lower

When Price Floors are Effective/ Ineffective?

Binding= surplus Non-binding= no change Price Floor= increase price+low quantity Surplus= Non-efficient, excess supply Consumer lose: price is higher, quantity is lower Producers win/lose: price is higher (win), quantity is lower (lose)

What is an efficient outcome

Efficient: MB= MC and total surplus is maximized - At any price where MB does not equal MC, there will be fewer transactions and total surplus will be lost

Reasons of Market Failure

Externalities Private Goods Public Goods

Adam Smith's Invisible Hand

Firms and individuals looking out for their own well being is better than the government interfering due to competition pressuring the market to reach equilibrium.

Non-Excludable Goods

Good that non-paying consumers cannot be prevented from accessing ex. public firework shows

Non-Rival Goods

Goods that allow consumption/possession to many people

Externality

Is an uncompensated benefit/cost that an individual or firm confers/imposes on others ex. car manufacturer pollutes nearby river the guy next to you is smoking

MSB Formula

MSB=MPB+MEB

MSC Formula

MSC= MPC+MEC

Calculating Tax Revenue

MSC= MPC+Tax -revenue collected can then be used to fix the cost of the externality

Consumer Surplus Value and Price

Marginal benefit/willingness to pay

Producer Surplus Cost and Price

Marginal cost/willingness to accept

Other methods of resource allocations

Market Price resource goes to the person who is willing to purchase at price set in market. Command: higher up chooses allocation. Majority Rules: allocated through voting Contest: decided through competition 1st come 1st serve: whoever gets it first can have it Sharing: equally dividing resources Lottery: leaving allocations up to chance Force: taking resources by force

Market Efficiency

Market reach efficiency when goods are produced in combination that match peoples willingness to pay; ...when MB=MC

Minimum Wage; Impact on CS,PS, DWL, and # of Workers

Minimum wage: -increase supply of workers b/c higher pay -reduces demand of workers b/c higher pay PS= workers surplus CS= producers surplus

Marginal Social Cost

Negative Externality - more cost than the marginal producer cost -includes cost of the negative externality on the third party

Marginal Private Cost

Negative Externality -used to just be marginal cost -less than the marginal social cost

Marginal External Cost

Negative externality - cost of the negative externality on the third party

Negative/ Positive externality affect on Market Equilibrium

Negative: create tax/property rights can be used to fix market outcome Positive: pay subsidy to producer can be used to fix market equilibrium

Coase Theorem

No matter which party has the property rights, the involved parties will bargain until they reach an efficient outcome. -does not work on high transaction prices

Marginal External Benefit

Positive Externality -distance between the MPB (Marginal Producer Benefit) and the MSB (Marginal Social Benefit)

Marginal Social Benefit

Positive Externality -includes the marginal benefit of the externality on 3rd parties -more benefit than MPB

Marginal Private Benefit

Positive Externality -what the buyer takes into consideration -less than MSB

How to find Price Ceiling/Floors

Qd Formula (Qd > Qs) LOOK ON PICTURE SAVED IN KKT

Tragedy of the Commons

Resources get depleted since no one has to pay but the resources are rival ex. Property rights

Price Floor

Sets the lowest price of which it is legal to trade a particular good or service. -set above equilibrium (binding) -set below equilibrium (nonbinding) ex. Minimum wage

Total Surplus

TS= CS+PS - Welfare of society

Elasticity and Tax

Tax burden falls more hardly on the relatively more inelastic side Elasticity of Supply= Consumers pay more for fix because of supply inelasticity

Tax impact of CS,PS and Efficiency

Taxes lower the equilibrium quantity to below the efficient quantity thus there is a DWL; making MB >MC - TS= Smaller b.c CS and PS shrink - CS and PS part is transferred to government - Some of the surplus is lost due to inefficient output levels

Public Good

both non-rival and non-excludable ex. Public roads - non-rival= still there even if someone else used it - non-excludable= anyone can access it - 'free-riding': stopped by taxes/contracts

Private Good

both rival and excludable ex. Cup of coffee -excludable: cant have without paying for it -rival: since consumed no one else may have it

Excludable Goods

can keep someone from using or consuming

How positive externalities create inefficiencies

competitive markets tend to produce to little of a good with a positive externality b/c MB is understated -MPB < MSB -MSB= MPB+MEB ex. flu shot keeps you from getting sick

How negative externalities create inefficiencies

competitive markets tend to produce too much of a good w/ a negative externality b/c the marginal cost is understated - MPC < MSC - MSC= MPC+MEC ex. water pollution from coffee production

Rival Goods

consumption by oneself makes it harder for another to consume

Market Failure

is a situation in which the allocation of goods and services is not efficient

Dead Weight Loss (DWL)

is loss in total surplus that results from an inefficient level of production -consumers and producers surplus lost is not transferred to any other party

Producer Surplus

is the difference between the amount that a firm gets to charge and the minimum amount the firm would be willing to accept Cost to produce/selling price - Welfare of the firm

Consumer Surplus

is the difference between the max amount a consumer is willing to pay and the amount they actually paid Willing to pay/ the price changed - Welfare of the homeowner

Price Ceiling

sets the highest price at which it is legal to trade a particular good or service -set below market equilibrium (binding) -set above (non-binding) ex. Rent Control

Common Resources

-"Natural" Resources - resources can get depleted since no one has to pay but the resources are rival = Rival but non-excludable