Glossary
Average Fixed Cost (AFC)
The total fixed costs of production divided by the total quantity of output. Lump-sum taxes directly increase AFC.
Example:
If a factory's rent is 5 per unit.
Average Total Cost (ATC)
The total cost of production divided by the total quantity of output. Both per-unit and lump-sum taxes can affect the ATC curve.
Example:
A bakery that spends 10 per cake.
Deadweight Loss
The loss of economic efficiency that occurs when the equilibrium for a good or service is not achieved, resulting in a reduction of total surplus (consumer and producer surplus). Monopolies inherently create deadweight loss.
Example:
When a monopolist restricts output to raise prices, some consumers who would have bought the product at a lower, efficient price are excluded, creating deadweight loss for society.
Fair-Return Point
The level of output for a regulated monopoly where price equals average total cost (P=ATC), allowing the firm to break even and earn zero economic profit. This avoids the need for government subsidies.
Example:
A regulated electricity company might be allowed to charge a price that covers all its costs, including a normal profit, operating at the fair-return point to avoid going out of business.
Government Intervention
Actions taken by a government to influence or control the economy, often to correct market failures or regulate industries. Examples include taxes, subsidies, and price controls.
Example:
To reduce pollution, a government might implement a carbon tax, which is a form of government intervention in the market.
Lump Sum Tax
A fixed, one-time tax that does not vary with the level of output. It affects a firm's fixed costs and average total cost but not its marginal cost.
Example:
A small business paying an annual $500 business license fee, regardless of how much they produce, is an example of a lump sum tax.
Marginal Cost (MC)
The additional cost incurred by producing one more unit of a good or service. Per-unit taxes directly impact and shift the MC curve.
Example:
If producing one more car costs an auto manufacturer an extra $10,000 in materials and labor, that's the marginal cost of that additional car.
Per-Unit Tax
A tax imposed on each unit of a good or service produced or sold. It directly increases the marginal cost of production for a firm.
Example:
If the government imposes a $1 tax on every bottle of soda produced, the cost for the soda company to make each additional bottle increases, affecting its per-unit tax.
Socially Optimal Point
The level of output where price equals marginal cost (P=MC), achieving allocative efficiency and maximizing social welfare. For a monopoly, reaching this point often requires a subsidy.
Example:
For a public utility like water, the government might aim for the socially optimal point where the price consumers pay for water equals the cost of providing the last unit, ensuring efficient resource allocation.
Subsidies
Financial assistance provided by the government to individuals or businesses, typically to encourage production or consumption of a good or service. They have the opposite effect of taxes on cost curves.
Example:
A government offering a payment to farmers for every bushel of corn they produce is providing subsidies to encourage agricultural output.
Unregulated Monopoly
A single firm that controls an entire market without government oversight. It maximizes profit by producing where marginal revenue equals marginal cost, leading to deadweight loss.
Example:
Before government intervention, a sole internet provider in a remote town operating without any price controls or competition would be an unregulated monopoly.