Welfare and Market Efficiency with Government Intervention

These flashcards cover vocabulary related to welfare, market efficiency, government intervention, and economic concepts discussed in the lecture.

Deadweight Loss

The difference in total welfare from the maximum total welfare and the actual total welfare of an allocation.

Government

An entity that has the authority to set and enforce rules of the market and economic activity.

polices enact by gov.

• taxes and subsidies

• price controls

• zoning laws and limiting firm entry

• goverment as producers or consumers

• quotas and tariffs

Government Revenue

The flow of money to or from the government.

Tax on Trade

A fee collected by the government for participating in trade.

Subsidy on Trade

A payment from the government for participating in trade.

Why does gov. impose taxes/subsidies 

• gov needs revenue to operate

• sometimes market isn’t complete so this helps correct it.

government collects portion of welfare created through trade

how tax works

taxes drive a wedge between —— and ——, regardless of who literally pays the government, the equilibrium is unique

supply and demand

measures how much of the price change casued by the tax is absorbed by either side of the market

tax burden

negative tax, pushes wedge between supply and demand, and gov. does this when they think market has too many positive externalities. After consumer and producer surplus are greater, gov revenue is negative and total welfare decreases. 

how subsidies work

Price Control

A policy which regulates the price in a market to be different than in the competitive equilibrium.

Price Floor

A price control which sets a minimum allowable price.

Price Ceiling

A price control which sets a maximum allowable price.

tariff

tax on international trade

help domestic producers, protect domestic jobs, national security, political pressure

why impose tariffs

Externality

anything that affects an agents payoff that they do not consume by choice

Transaction Cost

Anything that adds cost to trade, including bargaining, searching for goods, and enforcing rights.

Coase Theorem

In the absence of transaction costs, an economy will always reach the efficient allocation.

Internalize

agent does this to an externality if they pay the full cost and receive the full benefit of any action taken.

rivalrous

public good is one agents consumption of it prevents or diminishes other agents use

excludable

a good if agents can be prevented from using it

public good provides pos. ext.

undersupplied

public good neg. ext.

over-consumed

tradeable permit 

Gov. fixes the amount of externality allowed and distributes this property right, but allows trade

Tragedy of the Commons

A situation in which a common resource is over-consumed due to individuals acting in their self-interest.

Pigouvian Tax

A tax imposed on a market activity that generates negative externalities.

Game Theory

A model involving players making decisions that depend on the actions of others.

Nash Equilibrium

A set of actions where each player is playing a best response given what each other player is doing.