Exam II Review: Types of Questions and Concepts

These flashcards cover key concepts and terminology related to externalities, public and private goods, tariffs, consumer and producer surplus, and market dynamics essential for mastering economic principles.

Internalize an externality

To alter incentives so that people take into account the external effects of their actions.

Negative externality

An uncompensated impact of a person’s actions on the well-being of a bystander that is unfavorable.

Positive externality

An uncompensated impact of a person’s actions on the well-being of a bystander that is beneficial.

Tax burden

The division of the tax payment between buyers and sellers.

Supply and demand

A model that determines the price and quantity of a good in a market.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer surplus

The difference between what producers are willing to accept for a good and what they actually receive.

Deadweight loss

The loss of economic efficiency when the equilibrium outcome is not achievable.

Total surplus

The sum of consumer surplus and producer surplus.

World price

The price of a good that prevails in the world market for that good.

Tariff

A tax on goods produced abroad and sold domestically.

Public good

A good that is neither excludable nor rival in consumption.

Private good

A good that is both excludable and rival in consumption.

Common resource

A resource that is rival in consumption but not excludable.

Club good

A good that is excludable but not rival in consumption.

Marginal utility

The extra satisfaction from consuming one more unit of a good.

Marginal utility per dollar

The additional satisfaction gained from spending one additional dollar on a good.

Utility

The satisfaction or pleasure derived from consuming goods and services.

Tax revenue

The income gained by governments from taxation.

Elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in price.

Elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in price.

Incentives

Factors that motivate individuals to perform an action.

Market failure

A situation where the allocation of goods and services is not efficient.

Social cost

The total cost to society of producing a good, including both private and external costs.

Private cost

The cost incurred by producers of a good.

Tax per unit

The amount of tax charged for each unit of a good sold.

Bystander effect

The effect of the actions of one individual on the well-being of others.

Pigovian tax

A tax imposed on activities that generate negative externalities.

Corrective subsidy

A subsidy provided to encourage the production or consumption of goods with positive externalities.

Coase Theorem

A theory that posits that private parties can solve externalities on their own without government intervention.

Transaction costs

Costs incurred in the process of agreeing and following through on a bargain.

Free rider problem

A situation where individuals benefit from resources or services without paying for them.

Indifference curve

A graph showing different bundles of goods that provide the same level of utility to a consumer.

Budget constraint

The limit on the consumption bundles that a consumer can afford.

Marginal rate of substitution

The rate at which a consumer is willing to exchange one good for another while maintaining the same level of utility.

External benefits

The positive effect on a bystander resulting from an economic transaction.

External costs

The negative effect on a bystander resulting from an economic transaction.

Consumer surplus before a tariff

The consumer surplus calculated prior to any tariffs being imposed.

Total utility

The total satisfaction received from consuming a given total quantity of a good.

Marginal utility from consumption

The change in total utility resulting from the consumption of one additional unit of a good.

Utility maximizing condition

The condition where a consumer allocates their income such that the marginal utility per dollar spent on each good is equal.

Shifts in supply

Changes in the market supply curve due to factors like changes in production costs or technology.