ECON 1103 Test #2 Chapters 4,5, & 7

The Demand Curve Represents:

Marginal Benefit

The Supply Curve Represents:

Marginal Costs

Consumer Surplus

The area below the demand curve and above price

Marginal Cost

The additional cost to a firm of producing one more unit of a good or service

Producer Surplus

The area above supply curve and below price

Economic Surplus

The sum of Consumer Surplus and Producer Surplus

Price Floor

• Price ABOVE equilibrium price

• The legal minimum price

Price Ceiling

• Price BELOW equilibrium price

• The legal maximum price

Deadweight Loss

Reduction in Economic surplus resulting from a market not being in competitive equilibrium

Economic Surplus Maximized

When the market is in competitive equilibrium

Area of a triangle

½ X Base X Height

Area of a rectangle

Base X Height

Consumption Tax

A non-price factor of supply as the supplier bears the legal incidence of the tax

Excise Tax

A per-unit tax and shifts the supply curve vertically (parallel).

Sales Tax

A percent-of-value tax and results in a non-parallel shift

Forward Shifting

Passing the tax along in the form of a higher product

Backward shifting

Passing the tax along in the form of lower income

Economic Burden Of Tax

The dollar amount that has been shifted forward or backward

Excess Burden of the tax

The deadweight loss from the tax

Externality

• A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service

• Arthur Cecil Pigou introduced this concept, famous for Economics of Welfare

Private Cost

The cost borne by the producer of the good or service

Social Cost

The total cost of producing a good or service, equal to the private cost PLUS and external cost from an externality

Private Benefit

The benefit received by the consumer of a good or service

Social Benefit

The total benefit from consuming a good or service including both the private benefits and the benefits resulting from the externality

Transactions Costs

The costs in time and other resources that parties incur in the process of agreeing to and carrying out an exchange of goods or services.

Command and Control Approach

A policy that involves the government imposing quantitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices.

Rival

When one person consumes a unit of that good no one else can consume that specific unit. Any good which is exhausted in benefit after the consumer has it.

Nonrival

Good exchanged in the market but one person’s purchase does not “use up” the good so another cannot receive benefit from it.

Excludable

A restricting mechanism to allow only some people to have access to the good.

Nonexcludable

It is impossible to restrict another from consuming the good whether they have paid for it or not

Private Good

Both Rival and Excludable

Common Resource

• Rival but Nonexcludable

• Free riding and Tragedy of the commons exists here

Quasi Public Good

Excludable and Nonrival

Public Good

Both Nonrival and Nonexcludable

Free Riding

Benefiting from a good without paying for it

Single-payer health care system

• Health Care is provided by private firms, but paid for by the government. Individuals pay nothing out of pocket.

• Canada runs this system

Universal Health Insurance

• Every resident is required to enroll in a non-profit health insurance society, or in the government’s program

• Individuals have a substantial co-payments

Socialized Medicine

• A health care system under which the government owns most of the hospitals and employs most of the doctors

• The UK runs this system

United States Healthcare

• Health Care Service provided primarily from private firms

• Payment to those firms generally comes through health insurance

Fee-for-service

Where doctors and hospitals receive a payment from insurance/individuals for each service they provide

Health Maintenance Organizations

Where doctors receive a flat fee per patient

Affordable Care Act

Health care legislation passed by congress and signed by Obama in 2010

Adverse Selection

One party does not fully disclose information leading the second party to make an adverse choice based on the limited information

Moral Hazard

Refers to actions people take after entering a contract, that make the other party of the transaction worse off

Principal Agent Problem

Arises when a principal hires an agent to carry out business but there may be conflicting goals or interests. This can lead to suboptimal outcomes.

Positive Externality on Graph

Negative Externality on Graph

Pigovian Tax

A tax imposed on activities that generate negative externalities, designed to make producers and consumers bear the full social cost of their actions

Property Rights

Legal and social constructs that define ownership and control over resources, providing incentives for investment, innovation, and efficient resource allocations

Asymmetric Info

One party to an economic transaction has less information than the other party