All Flashcards
On a graph, what does the intersection of MSC and MSB indicate?
The intersection of MSC and MSB indicates an efficient allocation of resources, representing the socially optimal quantity.
On a graph, what area represents deadweight loss due to overproduction?
The area between the MSC and MSB curves, from the socially optimal quantity to the actual quantity produced.
On a graph, what area represents deadweight loss due to underproduction?
The area between the MSB and MSC curves, from the actual quantity produced to the socially optimal quantity.
How would you graphically represent a positive externality in production?
The MSB curve would lie above the MPB curve, reflecting the additional social benefits.
How would you graphically represent a negative externality in production?
The MSC curve would lie above the MPC curve, reflecting the additional social costs.
If a graph shows MPB and MPC intersecting at a quantity lower than where MSB and MSC intersect, what does this indicate?
This indicates a positive externality and underproduction in the market.
If a graph shows MPB and MPC intersecting at a quantity higher than where MSB and MSC intersect, what does this indicate?
This indicates a negative externality and overproduction in the market.
On a graph showing the market for education, how would you identify the area of deadweight loss?
The area of the triangle formed between the MSB and MSC curves, bounded by the market quantity (Q*) and the socially optimal quantity (Q).
On a graph, how is the size of the externality represented?
The vertical distance between the MPB and MSB curves (for positive externalities) or the MPC and MSC curves (for negative externalities).
How can a graph show the effect of a subsidy on a good with positive externalities?
The subsidy shifts the MPB curve upward, ideally to coincide with the MSB curve, increasing the quantity produced.
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 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.