All Flashcards
What are the key differences between MSB and MPB?
MSB includes both the private benefits to consumers and the external benefits to third parties, while MPB only considers the private benefits.
What are the key differences between MSC and MPC?
MSC includes both the private costs to producers and the external costs faced by third parties, while MPC only considers the private costs.
Compare and contrast positive and negative externalities.
Positive externalities create benefits for third parties, leading to underproduction. Negative externalities create costs for third parties, leading to overproduction.
How do subsidies and taxes differ in their impact on market equilibrium?
Subsidies increase quantity and decrease price (for consumers), while taxes decrease quantity and increase price (for consumers).
Differentiate between private and social costs.
Private costs are incurred by the producer, while social costs include private costs plus any external costs imposed on society.
Differentiate between private and social benefits.
Private benefits are enjoyed by the consumer, while social benefits include private benefits plus any external benefits enjoyed by society.
How do MPB/MPC differ from MSB/MSC in the absence of externalities?
In the absence of externalities, MPB = MSB and MPC = MSC.
What is the difference between allocative efficiency and productive efficiency?
Allocative efficiency occurs when MSB=MSC, while productive efficiency occurs when a firm produces at the lowest possible cost.
What is the difference between market equilibrium and socially optimal quantity?
Market equilibrium occurs where MPB=MPC, while the socially optimal quantity occurs where MSB=MSC. They are the same only when there are no externalities.
Compare and contrast the effects of a tax and a subsidy on producer surplus.
A tax decreases producer surplus, while a subsidy increases producer surplus.
How can a subsidy correct a market failure caused by a positive externality?
A subsidy can lower the private cost of production, encouraging more output and shifting the market quantity towards the socially optimal level.
How can a tax correct a market failure caused by a negative externality?
A tax can increase the private cost of production, discouraging output and shifting the market quantity towards the socially optimal level.
What is the effect of a government subsidy on flu vaccinations?
A subsidy increases the quantity of vaccinations by lowering the cost to consumers or producers.
What type of policy could the government use to correct the underproduction of education?
A subsidy to students or schools, or direct provision of education.
What is a potential drawback of using taxes to correct negative externalities?
Taxes can be politically unpopular and may lead to decreased production, potentially affecting employment.
What is a potential drawback of using subsidies to correct positive externalities?
Subsidies require government funding and can lead to overproduction if not carefully calibrated.
How does a subsidy affect the MPB curve?
A subsidy shifts the MPB curve upward, reflecting the reduced cost to consumers.
How does a tax affect the MPC curve?
A tax shifts the MPC curve upward, reflecting the increased cost to producers.
What is the goal of government intervention in markets with externalities?
To align private incentives with social costs and benefits, achieving a socially optimal outcome.
What is the effect of a tax on pollution on the MSC?
A tax on pollution internalizes the externality, causing the MPC to shift closer to the MSC, reducing overproduction.
What is Marginal Social Benefit (MSB)?
The total additional benefit to society from consuming one more unit of a good or service, including external benefits.
What is Marginal Social Cost (MSC)?
The total additional cost to society from producing one more unit of a good or service, including external costs.
Define Socially Optimal Quantity.
The quantity where MSB = MSC, maximizing total economic surplus and representing an efficient allocation of resources.
What is a socially efficient market outcome?
An outcome where resources are optimally allocated, considering all internal and external costs and benefits.
Define deadweight loss.
The loss of economic efficiency that occurs when equilibrium for a good or service is not Pareto optimal or is not achieved.
What is a positive externality?
A benefit that is enjoyed by a third-party as a result of an economic transaction.
What is a negative externality?
A cost that is suffered by a third party as a result of an economic transaction.
What is market failure?
A situation where the allocation of goods and services by a market is not efficient.
Define Marginal Private Benefit (MPB).
The benefit an individual consumer receives from consuming one more unit of a good or service.
Define Marginal Private Cost (MPC).
The cost an individual producer incurs from producing one more unit of a good or service.