All Flashcards
What is the difference between private cost and social cost?
Private cost is the cost to the producer; social cost includes private cost plus external costs.
What is the difference between private benefit and social benefit?
Private benefit is the benefit to the consumer; social benefit includes private benefit plus external benefits.
Compare the effects of taxes and subsidies.
Taxes decrease production; subsidies increase production.
What is the difference between MPC and MSC?
MPC reflects only the firm's cost. MSC includes both the firm's cost and the external cost to society.
What is the difference between MPB and MSB?
MPB reflects only the consumer's benefit. MSB includes both the consumer's benefit and the external benefit to society.
Compare the free market quantity and the socially optimal quantity with negative externalities.
Free market quantity is higher than the socially optimal quantity.
Compare the free market quantity and the socially optimal quantity with positive externalities.
Free market quantity is lower than the socially optimal quantity.
Compare Pigouvian taxes and subsidies.
Pigouvian taxes correct negative externalities, while Pigouvian subsidies correct positive externalities.
Compare command-and-control regulation with market-based solutions.
Command-and-control regulation sets direct limits, while market-based solutions use incentives to achieve desired outcomes.
Compare the effect of a tax on consumers vs. producers.
Taxes increase the cost to producers, shifting the supply curve. This leads to higher prices for consumers and lower quantity.
What is the goal of a per-unit tax on negative externalities?
To reduce production to the socially optimal quantity.
What is the goal of a per-unit subsidy on positive externalities?
To increase production to the socially optimal quantity.
How does a Pigouvian tax affect the supply curve?
It shifts the supply curve to the left, reducing output.
How does a Pigouvian subsidy affect the demand curve?
It shifts the demand curve to the right, increasing output.
What is the impact of a tax on a monopolist with a negative externality?
It can increase deadweight loss if it causes the firm to underproduce relative to the socially optimal quantity.
What happens if a tax is greater than the external cost?
Overcorrection; production falls below the socially optimal level.
What happens if a subsidy is greater than the external benefit?
Overcorrection; production rises above the socially optimal level.
What is the effect of tradable pollution permits?
Firms can buy and sell permits, creating a market for pollution and incentivizing reduction.
What is a command-and-control regulation?
Direct regulation of pollution levels or production processes.
What is a disadvantage of command-and-control regulation?
It may be less efficient than market-based solutions like taxes or permits.
In a negative externality graph, where is the free market quantity (QFM)?
Where MPC = MSB.
In a negative externality graph, where is the socially optimal quantity (QSO)?
Where MSC = MSB.
In a negative externality graph, what area represents the deadweight loss?
The area between QFM and QSO, bounded by MSC and MSB.
In a positive externality graph, where is the free market quantity (QFM)?
Where MPB = MSC.
In a positive externality graph, where is the socially optimal quantity (QSO)?
Where MSB = MSC.
In a positive externality graph, what area represents the deadweight loss?
The area between QFM and QSO, bounded by MSB and MSC.
What does the vertical distance between MPC and MSC represent?
The external cost per unit.
What does the vertical distance between MPB and MSB represent?
The external benefit per unit.
How does a per-unit tax shift the MPC curve?
It shifts the MPC curve leftward (upward) towards the MSC curve.
How does a per-unit subsidy shift the MPB curve?
It shifts the MPB curve rightward (upward) towards the MSB curve.