Taxation: part 2 - Week 6

In context of resource use

Allocative efficiency

Is achieved when we push the resource use to the point where the MSB is equal to the MSC

Allocatively efficient

At point E*, MSB = MSC (Marginal Social Benefit = Marginal Social Cost. The marginal benefit of resources is equal to the resource cost of resources to society.

Allocatively inefficient

At the new market equilibrium with the unit tax (E1), MSC < MSB = not allocatively efficient. This is because there is an additional cost in producing the good, however at the expense of providing goods exactly at that tax per unit

Subsidy

For every unit purchased, the government pays s£ per unit. Requires a budget on how a government can finance this

Price ceiling

Price cap. Makes a product more affordable to consumers

Shortage

Quantity demanded > Quantity supplied. Occurs in a price ceiling

Price floor

Is set above what the market would deliver; the equilibrium price

Surplus

When excess occurs, we observe downward pressure on price.

MPC

Marginal partial cost

MEC

Marginal external cost

MSC

MPC + MEC

Market failure

Positive or negative externalities mean market failure. In a sense that, we don’t anticipate the market would deliver E*, it will deliver something else

MSC

Marginal Social Cost. The cost to society in order to produce a good

MSB

Marginal Social Benefit. The benefit to society in order to produce a good