Chapter 4: Economic Efficiency, Government Price Setting, and Taxes

Consumer Surplus

The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

Deadweight loss

The actual economic surplus resulting from a market not being in competitive equilibrium

Economic Efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at maximum

Economic Surplus

The sum of consumer surplus and producer surplus

Illicit Market

A market in which buying and selling take place that violate government price regulations

Marginal Benefit

The additional benefit to a consumer from consuming one more unit of a good or service

Marginal Cost

The change in a firm’s total cost from producing one more unit of a good or service

Price ceiling

A legally determined maximum price that sellers may charge

Price Floor

A legally determined minimum price that sellers may receive

Producer Surplus

The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

Tax incidence

The actual division of the burden of a tax between buyers and sellers in a market