Revise later
SpaceTo flip
If confident
All Flashcards
How does a positive externality affect the socially optimal quantity?
A positive externality causes the socially optimal quantity to be higher than the market equilibrium quantity.
How does a negative externality affect the socially optimal quantity?
A negative externality causes the socially optimal quantity to be lower than the market equilibrium quantity.
How does MSB > MSC relate to production levels?
If MSB > MSC, society benefits more from producing more, indicating underproduction.
How does MSB < MSC relate to production levels?
If MSB < MSC, society loses more than it gains from producing more, indicating overproduction.
Why does the MSB curve slope downward?
The MSB curve slopes downward due to diminishing marginal utility. As consumption increases, the additional satisfaction from each extra unit decreases.
Why does the MSC curve slope upward?
The MSC curve slopes upward because of increasing negative externalities (like pollution) and the rising opportunity cost of using scarce resources.
In the context of education, why is MSB > MPB?
Education generates positive externalities, benefiting society as a whole beyond the individual student.
How does the market for flu vaccinations demonstrate positive externalities?
Vaccinations benefit not only the individual but also reduce the spread of disease, benefiting society as a whole.
How do externalities lead to market failure?
Externalities cause private costs/benefits to diverge from social costs/benefits, resulting in inefficient resource allocation.
How does pollution from a factory relate to MSC?
Pollution represents an external cost, increasing the MSC above the private cost of production.
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.
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.