ECN 101 - Externalities & Market Power
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23 Terms
externality
cost/benefit arising from production falling on a non-producer or a consumption falling on a non-consumer
negative externality
produces an external cost
ex: pollution (production), second-hand smoke (consumption)
positive externality
produces an external benefit
ex: technological innovations (production), vaccines (consumption)
private cost
cost of producing additional unit of a good, falls on producer, represented by supply curve
external cost
cost producing additional unit of good, falls on non-producer
social cost of negative production externality
private cost - external cost
social curve is above private cost curve
social optimal quantity
intersection of social cost & demand curve
social cost of positive production externality
private cost - external benefit
social curve is below private cost curve
social value of positive consumption externality
value of a good to society
private value + external benefit
social curve is above demand curve
social value of negative consumption externality
private value - external cost
demand curve in competitive market
horizontal, set at market price
MR = P
total revenue
total amount earned from selling a good
price * quantity
average revenue
total revenue/quantity
always equal to price
marginal revenue
extra money earned from selling additional unit
total rev/quantity
equal to price where perfectly competitive
firm’s maximum profit (both markets)
marginal cost = marginal revenue
average total cost
total cost/quantity
total cost
average total cost * quantity
profit
total revenue - total cost
(price*quantity) - (average total cost * quantity)
demand curve of monopoly
downward sloping
price > marginal revenue
maximum profit value (monopoly)
quantity on demand curve where MC = MR
highest price consumers wtp
markup
price - marginal cost
can charge more markup when demand is inelastic
lerner index
measure of market power
L = (price - marginal cost)/price
0 → no market power
close to 1 → high market power
deadweight loss (monopoly)
(monopoly price - marginal cost)*(efficient quantity - monopoly quantity)