All Flashcards
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.
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.
How does pollution relate to negative externalities?
Pollution is a classic example where a factory's production imposes costs (health, environmental) on others.
How do vaccinations relate to positive externalities?
Vaccinations benefit not only the individual but also prevent the spread of disease to others.
Why does the market overproduce with negative externalities?
Firms don't bear the full social cost, leading to excess production.
Why does the market underproduce with positive externalities?
Consumers don't capture the full social benefit, leading to insufficient production.
How does education create positive externalities?
Education leads to a more informed and productive society, benefiting everyone.
What is the effect of a per-unit tax on production?
It increases the cost of production, shifting the MPC curve leftward and reducing output.
What is the effect of a per-unit subsidy on consumption?
It decreases the cost of consumption, shifting the MPB curve rightward and increasing output.
How do Pigouvian taxes correct market failure?
By internalizing the external costs of negative externalities, leading to a socially optimal output.
How do Pigouvian subsidies correct market failure?
By internalizing the external benefits of positive externalities, leading to a socially optimal output.
How does secondhand smoke relate to negative externalities?
It negatively affects the health of those nearby, imposing a cost on them.