29 terms

Principles of Microeconomics (Chapters 8-11)

Tragedy of the Commons
A parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
Cost-Benefit Analysis
A study that compares the costs and benefits to society of providing a public good
A person who recieves the benefit of a good but avoids paying for it
Common Resources
Goods that are rival in consumption but not excludable
Public Goods
Goods that are neither excludable nor rival in consumption
Private Goods
Goods that are both excludable and rival in consumption
Rivalry in Consumption
The property of a good whereby one person's use diminishes other people's use
The property of a good whereby a person can be prevented from using it
Corrective Tax
A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
Transaction Costs
The costs that parties incur in the process of agreeing to and following through on a bargain
Coase Theorem
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Internalizing the Externality
Altering incentives so that people take account of the external effects of their actions
The uncompensated impact of one person's actions on the well-being of a bystander
A tax on goods produced abroad and sold domestically
World Price
The price of a good that prevails in the world market for that good
Deadweight Loss
The fall in total surplus that results from a market distortion, such as a tax
Tax Revenue
Area of rectangle between supply and demand curves
Height of rectangle
size of the tax, T
Width of rectangle
quantity of good sold, Q
Consumer surplus
Area between demand curve and price
Producer surplus
Area between supply curve and price
Price paid by buyers rises
Consumer surplus equals the area below demand curve and above the buyers price
Price recieved by sellers falls
Producer surplus eqauls area above supply curve and below sellers price
Deadweight loss is larger
when the supply curve is more elastic
When supply is inelastic
deadweight loss of a tax is small
When supply is elastic
deadweight loss of a tax is large
When demand is inelastic
deadweight loss is large
When demand is elastic
deadweight loss is small
Laffer's Argument
Lower taxes raise tax revenue