Economics: International Trade, Externalities, Public Goods, and Competitive Firm Decisions

Comprehensive vocabulary flashcards covering the economic analysis of international trade, tariffs, externalities, public goods, common resources, and perfectly competitive firm decisions.

Domestic Demand Curve

A curve that shows the quantity of a product that all domestic consumers plan to buy at a given price.

Domestic Supply Curve

A curve that shows the quantity of a product that all domestic suppliers plan to provide at a given price.

No-Trade Equilibrium

The market outcome that occurs when there is no international trade, where the quantity demanded by domestic buyers equals the quantity supplied by domestic producers.

Consumer surplus with no trade

A

Tariff

A tax imposed on imported goods.

Government revenue

E

Deadweight loss

D+F

Transfer from domestic consumers to domestic producer

C

Pre-tarriff producer surplus

G

Post-tarriff producer surplus

G+C

Pre-tarriff consumer surplus

A+C

Post-tarriff consumer surplus

A

Consumer surplus with trade

A+B+D

Import Quota

A limit placed on the quantity of a good that can be imported, which generates the same market outcome as a tariff but yields no government revenue.

National security argument

National security requires that we produce critically important goods ourselves

National security counterargument

Fears are overstated and prohibiting trade is a security risk as well

Infant Industry Argument

The rationale that governments can help establish new domestic industries by shielding fledgling businesses from international competition

Infant Industry Counterargument

Infant industries often fail to grow up

Dumping

The unfair trade practice where foreign firms temporarily charge extremely low prices to drive domestic competitors out of business, aiming to subsequently reduce supply and raise prices.

Dumping counterargument

It can be hard to tell if a firm is dumping, or if it is just highly efficient

Skirting regulations argument

Foreign firms can make cheaper goods by failing to comply to US ethical standards in pollution, fair pay, or child labor

Skirting regulations counterargument

Trading with poorer countries facilitates economic development that will make stricter labor and environmental standards more feasible in the long run

Private Cost

A cost directly paid by the consumer or producer participating in a market transaction.

Job Loss Argument

Restricting trade can preserve jobs in import-competing sectors that would otherwise leave the US

Job Loss Counterargument

Exporting industries will grow, people will retrain, and eventually, the job market will re-establish itself

External Cost

A cost imposed on bystanders who are neither the consumer nor the producer trading in the market.

Social Cost

The total cost borne by everyone in society, calculated as private cost plus external cost.

Private Benefit

A direct benefit received by the consumer or producer participating in a market transaction.

External Benefit

A benefit received by bystanders who are neither the consumer nor the producer trading in the market.

Social Benefit

The total benefit to everyone in society, calculated as private benefit plus external benefit.

Externality

An external cost or benefit that falls on bystanders not directly involved in the market transaction.

Negative Production Externality

An externality that occurs when a firm's production reduces the well-being of someone who is not compensated, leading the market to overproduce the good.

Negative Consumption Externality

An externality that occurs when an individual's consumption reduces the well-being of someone who is not compensated.

Positive Production Externality

An externality that occurs when a firm's production improves the well-being of someone without compensation to the firm, leading the market to underproduce the good.

Positive Consumption Externality

An externality that occurs when an individual's consumption improves the well-being of someone without that bystander compensating the consumer.

Marginal Private Cost (MPC)

The marginal cost curve of production paid by suppliers, representing the standard supply curve.

Marginal External Cost (MEC)

The extra cost imposed on bystanders from producing one additional unit of output.

Marginal Social Cost (MSC)

All marginal costs regardless of who pays them, defined by the formula $MSC = MPC + MEC$.

Social Surplus

The overall economic welfare generated in a market, calculated as consumer surplus plus producer surplus plus everyone else's surplus.

Efficient Quantity

The quantity of output that maximizes total social surplus.

Coase Theorem

The proposition that if transaction costs are low and property rights are clearly defined and enforced, private bargaining will lead to an efficient market outcome even in the presence of externalities.

Pigouvian Tax

A corrective per-unit tax set equal to the marginal external cost, forcing individuals or firms to internalize the negative externalities they create.

Pigouvian Subsidy

A corrective subsidy set equal to the marginal external benefit, inducing individuals or firms to fully internalize the positive externalities they generate.

Principle of Targeting

The policy principle stating that corrective taxes should be applied directly to the externality itself rather than to the activity or good that causes it.

Cap and Trade

A quantity regulation system where the government sets an overall limit on emissions, issues a matching number of permits ($Q$), and allows firms to trade them to achieve emissions reduction at lowest cost.

Command and Control

Direct laws, rules, and regulations that mandate specific behaviors or limits, often acting as a blunt and inflexible instrument compared to market-based policies.

Nonexcludable Good

A good for which it is difficult or impossible to prevent people who do not pay from using it.

Nonrival Good

A good where one person's consumption or use does not diminish the ability of others to use the same good simultaneously.

Private Goods

Goods that are both excludable and rival in consumption

Public Goods

Goods that are both nonexcludable and nonrival

Free Rider

A person who enjoys the benefits of a public good without contributing to or paying a share of its costs.

Forced Rider

An individual who is forced to pay a share of the costs of a public good through taxes but does not enjoy its benefits.

Club Goods

Goods that are excludable but nonrival

Common Resources

Goods that are rival in consumption but nonexcludable

Tragedy of the Commons

The tendency of any unowned, nonexcludable resource to be systematically overused and undermaintained.

Perfect Competition

A market structure characterized by many buyers and sellers each small relative to the total market, selling identical products, with no individual power to set prices.

Short Run

The time horizon in production before firms have the ability to enter or exit an industry.

Long Run

The time horizon sufficient for all existing firms to exit or new firms to enter an industry.

Sunk Costs

Past costs that have already been incurred, cannot be recovered or altered, and should be ignored in current decision-making.

Explicit Costs

Monetary expenses that require direct cash outlays by the firm.

Implicit Costs

Opportunity costs of production that do not involve an outlay of money.

Accounting Profit

A firm's total revenue minus its explicit costs $\text{Accounting Profit} = Total\,Revenue - Explicit\,Costs$.

Economic Profit

A firm's total revenue minus total economic costs, incorporating both explicit costs and implicit opportunity costs $\text{Economic Profit} = Total\,Revenue - Total\,Costs$.

Fixed Costs (FC)

Costs that do not vary with the quantity of output produced, such as rent and property upkeep.

Variable Costs (VC)

Costs that fluctuate directly with the quantity of output produced, such as raw material inputs.

Marginal Revenue (MR)

The change in total revenue gained from selling one additional unit of output, defined as $MR = \frac{\Delta TR}{\Delta Q}$, which equals the market price ($P$) in a competitive firm.

Marginal Cost (MC)

The additional cost incurred by producing one additional unit of output, defined as $MC = \frac{\Delta TC}{\Delta Q}$.

Profit Maximization Rule

The principle stating that a firm maximizes its profits by producing output up to the point where marginal revenue equals marginal cost ($MR = MC$).

Average Cost (AC)

The total cost of production divided by total quantity produced ($\frac{TC}{Q}$), used to determine per-unit profit via $\text{Profit} = (P - AC) \times Q$.

Normal Profit

A zero economic profit state occurring where price equals average cost ($P = AC$

Shutdown Rule

The condition under which a firm should immediately cease production in the short run, triggered when total revenue is less than variable cost ($TR < VC$) or price falls below average variable cost ($P < AVC$).

What happens when imports are allowed?

Price declines to world price, quantity supplied domestically decreases, and domestic demand increases, and imports make the difference

What happens when exports are allowed

Price of exported goods tises to world price, quantity supplied domestically increases, and domestic demand decreases, and exports make the difference

Producer surplus with no trade

B+C

Producer surplus with trade

C

Total surplus with no trade

A+B+C

Total surplus with trade

A+B+C+D

Consumer surplus with no trade

A