Unit 6 - Market Failure and the Role of Government Guide

Negative externality

when someone uses a product, it decreases the benefit of others

Positive externality

when one uses a product, others benefit

Lorenz curve

measures the distribution of income equality (you want to be as close of possible to the perfect equality line as possible)

Regressive

taxes are lower % on people earning a higher income (increases income inequality)

Progressive

axes are higher % on people earning a higher income (reduces income inequality)

Public goods

underproduced due to freeloader problem.

Social efficiency

is when resources are allocated effectively.

Non price regulation

works like taxes, they ensure competition /environmental protection /health and safety.

Lump sum subsidy

gives benefit no matter how many units.

Freeloader problem

people can enjoy the benefit of a good /service without paying.

Proportional

everyone pays the same percentage of their income (no impact on income distribution)

Rivalrous good

if someone consumers a product, others can not.

Per unit subsidy

gives benefits per unit.

Monopolistic competition

becomes MR curve, price and output decreases.

Excludable good

non payers can be prevented from enjoying the benefits.

Antitrust policy

promote competition and prevents monopolies.

Income distribution

measures % of income that goes to individuals in different percentiles /brackets.

Perfectly competitive market

 S=D, MB=MC

Perfectly competitive firm

 P=MC

Market failure

exists when firms produce at MPC=MPC, S=D

Externality

when external cost/benefit is placed on members of society who did not pay for them

Negative externality

when someone uses a product, it decreases the benefit of others (ex

Positive externality

when one uses a product, others benefit  (ex

Rivalrous good

if someone consumers a product, others cannot

Rivalrous

food, shoes, etc

Nonrivalrous

national defense, fireworks, etc

Excludable good

non payers can be prevented from enjoying the benefits

Excludable

food, school, etc

Nonexcludable

national defense, air, etc

Public goods

underproduced due to freeloader problem

Freeloader problem

people can enjoy the benefit of a good/service without paying

Private goods

goods produced by private markets, can be excludable

Per unit subsidy

 gives benefits per unit

Perfect competition

MC, ATC, AVC decreases, price doesnt change (price taker)

Monopolistic competition

MC, ATC, price decreases (price maker @ MR=MC)

Lump sum subsidy

gives benefit no matter how many units

Per unit tax

 increase MC, ATC, and AVC

Perfect competition

MC, ATC, AVC increases, price doesnt change (price taker)

Monopolistic competition

MC, ATC, price increases (price maker @ MR=MC)

Lump sum tax

only increase ATC

Non price regulation

works like taxes, they ensure competition/environmental protection/health and safety

Antitrust policy

promote competition and prevents monopolies

Price ceiling

 sets minimum price

Perfect competition

causes shortage

Monopolistic competition

 becomes MR curve, price and output decreases

Price floor

 sets maximum price

Perfect competition

leads to surplus

Monopsony

wages go up and workers go up

Income distribution

 measures % of income that goes to individuals in different percentiles/brackets

In a system with perfectly equality

 everyone would receive equal shares of income

Income

wages, rent, interest, profit

Lorenz curve

measures the distribution of income equality  (you want to be as close of possible to the perfect equality line as possible)

Proportional

 everyone pays the same percentage of their income (no impact on income distribution)

Progressive

 taxes are higher % on people earning a higher income (reduces income inequality)

Regressive

 taxes are lower % on people earning a higher income (increases income inequality)