ECON 2000 Exam 2

Total Welfare

Total happiness

Consumer surplus

Difference between what you are willing to pay for a good and the price.

Producer surplus

The difference between what it costs to produce a good and the selling price.

Total Surplus

Consumer surplus + Producer surplus

Efficiency

The way we allocate our resources maximizes total surplus.

Price ceiling

A rule that says you can’t charge more than $X.

Price floor

A rule that says you can’t sell for less than $Y.

Binding price control

A limit that forces us away from the market outcome.

Nonbinding price control

A limit that is irrelevant.

Tax wedge

Gap between the price paid and the price received

Tax incidence

How much of a tax is really paid by buyers and how much by sellers?

Deadweight loss

The surplus that we lose because of our policy.

Positive externality

Activity in the market makes bystanders happier

Negative externality

Activity in the market makes bystanders less happy.

Social optimum

The production or consumption level of a good that maximizes overall societal welfare, balancing total benefits and costs

Corrective tax

A tax designed to reduce negative externalities

Coase theorem

The person that’s creating the externality and then the person that’s being affected by the externality can bargain

Market-based solution

Policy instruments and economic mechanisms that use financial incentives and price signals to drive behavorial changes and address collective problems.

Rival good

My using it means there’s less of it for you

Nonrival good

Resources consumed by one person without diminishing their availability or quality for others

Excludable good

I can prevent you from using it if you didn’t buy it

Nonexcludable good

Products or services that individuals cannot be prevented from using once they are provided, regardless of whether they paid for them.

Public good

A commodity or service that is non-rivalrous(one person’s use does not reduce availability) and non-excludable(non-payers cannot be prevented from using it).

Common resource

Is rivalrous(one person’s consumption reduces availability for others), but non-excludable(difficult to prevent people from using it.

Club good

An economic term for a good or service that is excludable(requires payment or membership), but non-rivalrous(consumption by one person does not reduce availability for others).

Private goods

Both excludable(non-payers can be prevented from using them) and rivalrous(one person’s consumption prevents others from consuming them)

Free rider problem

If something is not excludable, we have no way to keep people who don’t pay for it from free riding

Free riding

Someone who benefits from something that they didn’t help pay for

Tragedy of the commons

Individuals, acting in their own self-interest, overuse a shared, unregulated resource, ultimately depleting it for everyone.