Chapter 12 Microecon

What are the different types of costs?

Private cost: paid by consumer/producer

External cost: paid by bystanders (ppl other than consumer/producer)

Social cost: cost to everyone

What’s externalities?

External costs/benefits that fall on bystanders (a difference between external and private costs)

What’s the solution to externalities?

Pigouvian tax: tax equal to external tax, makes private cost+tax=social cost

When do free markets fail?

When private cost doesn’t meet social cost. Either too much (negative externalities) or too little (positive externalities) production

What’s a negative externality of supply?

When production of a good creates negative spillover costs

What does MPC mean?

Marginal private cost; for producers; cost of production within the market

What does MSC mean?

Marginal social cost; for producers; total costs of production for firms and society

What does Qso mean?

Socially optimal quantity when all costs are taken into account

What does Pso mean?

Price socially optimal, Price if all costs taken into account

What does DWL mean?

Loss of total welfare resulting from overproduction of said good/service

What does MPB mean?

Marginal private benefit; for consumers; benefit of consumption within a market

What does MSB mean?

Marginal social benefit; for consumers; total benefit of consumption for consumers and society

What’s the negative externality of consumption?

Private benefits>social benefits. Creates negative spillover effects

What’s a pollution permit?

Right to release pollution, a limited amount of permits

Why are pollution permits optimal to decrease pollution?

Ppl can sell unused permits and can lower pollution in the factories that can

Why is market failure not optimal?

Market prices and market distribution fail to provide proper signals to firms and consumers

How do you correct a negative externality?

1. Costs/prices increase to reflect costs to society

2. Production and distribution must decrease to limit distribution of damaging spillover effects

What are the market prices and quantity of goods with negative externalities?

Surplus and price is too low

What is MSB’s formula?

MSB=MPB+externality

What is MPS’s formula?

MSC=MPC+externality

What does DC mean?

Externality

What does D=MB mean?

Demand=marginal benefit, no consumption externalities