chapter 7: welfare economics

Consumer surplus

the economic surplus gained from buying something, Marginal benefit-price, Area below the demand curve and above the price, Earned on all but your last purchase

Deadweight loss

how far economic surplus falls below the efficient outcome, Economic surplus at efficient quantity - actual economic surplus

Distributional consequences

how the costs, benefits, and other economic impacts of a policy or event are unevenly spread across different groups in society

Economic efficiency

outcome that yields more economic surplus

Economic surplus

the benefits that follow from a decision - the costs you incur

Efficient allocation

when goods are allocated to create the largest economic surplus from them, each good goes to the person who gets the highest marginal benefit from it

Efficient outcome

yields the most economic surplus

Efficient production

when a given level of output is produced at the lowest possible cost

Efficient quantity

quantity that produces the largest economic surplus

Equity

whether a policy will yield a fair distribution of economic benefits

Government failure

when government policies lead to worse outcomes

Market failure

when the forces of supply and demand lead to an inefficient outcome

Sources of market failure

market power undermines competitive pressures, externalities created without compensation, information problems undermine trust, irrationality, government regulations impede market forces

Producer surplus

the economic surplus gained from selling something, Price - cost

Rational rule for markets

produce until marginal benefit equals marginal cost

Voluntary exchange

buyers and sellers exchange money for goods only if they both want to