Terms in this set (25)
demand-side market failures
when demand curves do not reflect consumers full willingness to pay for a good or service
-arise because it is impossible in certain cases to charge consumers what they are willing to pay for a product
supply-side market failures
when supply curves do not reflect the full cost of producing a good or service
-arise in situations in which a firm does not have to pay the full cost of producing its output
-ex. coal burning power plant
The benefit surplus received by a consumer or consumers in a market
-the difference between the maximum price a consumer is (or consumers are) willing to pay for a product and the actual price that they do pay
-1.25/apple-wont pay more--if apple is .50c then you have a consumer surplus of .75c
-Consumer surplus and price are inversely (negatively) related. Given the demand curve, higher prices reduce consumer surplus; lower prices increase it
-the difference between the actual price a producer receives (or producers receive) and the minimum acceptable price that a consumer would have to pay the producer to make a particular unit of output available
-A producer's minimum acceptable price for a particular unit will equal the producer's marginal cost of producing that particular unit
-In addition to equaling marginal cost, a producer's minimum acceptable price can also be interpreted as the opportunity cost of bidding resources away from the production of other products
minimum acceptable price
he lowest price you could pay her such that she can just break even after bidding away from other uses the land, labor, capital, and entrepreneurship necessary to produce the apple
is achieved because competition forces orange growers to use the best technologies and combinations of resources available. Doing so minimizes the per-unit cost of the output produced.
is achieved because the correct quantity of oranges—Q1—is produced relative to other goods and services.
-Allocative efficiency occurs at the market equilibrium quantity where three conditions exist simultaneously:
MB = MC (Figure 1.3).
Maximum willingness to pay = minimum acceptable price.
Total surplus (= sum of consumer and producer surplus) is at a maximum.
reductions of combined consumer and producer surplus—result from both underproduction and overproduction
-And because buyers and sellers are members of society, it represents an efficiency loss (or a so-called deadweight loss) to society.
goods offered for sale in stores, in shops, and on the Internet. Examples include automobiles, clothing, personal computers, household appliances, and sporting goods. Private goods are distinguished by rivalry and excludability
(in consumption) means that when one person buys and consumes a product, it is not available for another person to buy and consume. When Adams purchases and drinks a bottle of mineral water, it is not available for Benson to purchase and consume.
sellers can keep people who do not pay for a product from obtaining its benefits. Only people who are willing and able to pay the market price for bottles of water can obtain these drinks and the benefits they confer.
non-rivalry and non-excludability
(in consumption) means that one person's consumption of a good does not preclude consumption of the good by others. Everyone can simultaneously obtain the benefit from a public good such as national defense, street lighting, a global positioning system, or environmental protection.
means there is no effective way of excluding individuals from the benefit of the good once it comes into existence. Once in place, you cannot exclude someone from benefiting from national defense, street lighting, a global positioning system, or environmental protection.
The more free riding, the less demand. And if all consumers free ride, demand will collapse all the way to zero.
-ex. street entertainers
for deciding whether to provide a particular public good and how much of it to provide. Like our example, cost-benefit analysis (or marginal-benefit- marginal-cost analysis) involves a comparison of marginal costs and marginal benefits
-It can also help the government decide on the extent to which a project should be pursued
tells us which plan provides the maximum excess of total benefits over total costs or, in other words, the plan that provides society with the maximum net benefit
include education, streets and highways, police and fire protection, libraries and museums, preventive medicine, and sewage disposal. They could all be priced and provided by private firms through the market system. But, because the benefits of these goods flow well beyond the benefit to individual buyers, these goods would be underproduced by the market system. Therefore, government often provides them to avoid the underallocation of resources that would otherwise occur.
-If the resources of the economy are fully employed, government must free up resources from the production of private goods and make them available for producing public and quasi-public goods
- It does so by reducing private demand for them. And it does that by levying taxes on households and businesses, taking some of their income out of the circular flow
-As a result, the private demand for goods and services declines, as does the private demand for resources. So by diverting purchasing power from private spenders to government, taxes remove resources from private use.
Public goods are characterized by nonrivalry and nonexcludability.
The demand (marginal-benefit) curve for a public good is found by vertically adding the prices that all the members of society are willing to pay for the last unit of output at various output levels.
The socially optimal amount of a public good is the amount at which the marginal cost and marginal benefit of the good are equal.
Cost-benefit analysis is the method of evaluating alternative projects or sizes of projects by comparing the marginal cost and marginal benefit and applying the MC = MB rule.
The government uses taxes to reallocate resources from the production of private goods to the production of public and quasi-public goods.
occurs when some of the costs or the benefits of a good or service are passed onto or "spill over to" someone other than the immediate buyer or seller. Such spillovers are called externalities because they are benefits or costs that accrue to some third party that is external to the market transaction.
-cause supply-side market failures
-This failure to account for all production costs causes firms' supply curves to shift to the right of (or below) where they would be if firms properly accounted for all costs
-cause demand-side market failures
- These failures happen because market demand curves in such cases fail to include the willingness to pay of the third parties who receive the external benefits caused by the positive externality
-This failure to account for all benefits shifts market demand curves to the left of (or below) where they would be if they included all benefits and the willingness to pay of both the third parties as well as the primary beneficiaries
government intervention on issues
-clean air act
For example, the government has placed a manufacturing excise tax on CFCs, which deplete the stratospheric ozone layer protecting the earth from excessive solar ultraviolet radiation. Facing such an excise tax, manufacturers must decide whether to pay the tax or expend additional funds to purchase or develop substitute products.