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.
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.
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.