AP micro chapter 4&5

Market Failure

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or under allocation of resources to the production of a particular good or service because of externalities, asymmetric information, or because markets fail to provide desired public goods

Consumer Surplus

The maximum price a consumer is willing to pay – the actual price of the product

Producer Surplus

The difference between the actual price a product costs and the acceptable price a consumer would be willing to pay.

Efficiency losses (Deadweight loss)

reduction of total surplus result from both underproduction and overproduction

Negative externality

cost imposed without compensation on third parties by the production or consumption of sellers and buyers.

Positive externality

A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers.

Subsidies

Lowering the cost of a product/service through government funding to correct for underproduction. Allows more consumers to acquire the product or service and thus shift the demand curve to the right.

Asymmetric information

Private Goods

a good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.

Rivalry

When one person consumes a product it is not available for another person to consume

Excludability

Sellers can prevent people who do not pay for a product from obtaining its benefits

Public goods

Products that typically can’t be provided for a profit and so government use tax revenue to provide them

Nonrivalry

One person’s consumption of a good does not preclude consumption of the good by others (Ex. National defense, streetlights, GPS)

Non-excludability

No effective way of excluding individuals from the benefit of the good once it comes into existence

Quasi-Public Good

Good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under allocation of resources

Principal-agent problem

At a firm, the conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals’ (stockholders) goals. (2) When elected officials (who are the agents of the people) pursue policies that are in their own interests rather than those that would benefit voters

Special-interest effect

Any political outcome in which a small group gains substantially at the expense of s much larger number of people who each individually suffers a small loss

Rent-Seeking Behavior

Attempts by individuals, firms, or unions to use political influence to receive payments in excess of the minimum amount they would normally be willing to accept to provide a particular good or service.

Regulatory capture

Occurs when a government regulatory agency ends up being controlled by the industry that it is supposed to be regulating. Typically happens when people hired by a regulator are people who have worked or plan to work in the industry being regulated

Political corruption

Unlawful misdirection of government resources or when officials abuse their entrusted powers for personal gain