Econ Midterm 2

price taker

firm or consumer that must accept the market price because they have no power to change it

price setter

the firm that has enough influence in the market to alter the price

f PD < PW

Domestic country has comparative advantage, country exports the good

If PD > PW

Domestic country does not have comparative advantage, country imports

the good

tariff

tax paid to the government by the importer of the good

free trade

domestic price with trade is the world price

with tariffs

domestic price with trade is the world price plus tariffs

Externality

The uncompensated impact of one person’s actions on the well-being of a bystander

Negative externality

Impact on the bystander is adverse

Positive externality

Impact on the bystander is beneficial

social-cost curve

Supply curve (cost curve) that is private cost + external cost, Takes into account the external costs imposed on society

Internalizing the externality

Altering incentives so that people take into account the external effects of their actions

pigouvian/corrective tax

a tax used to incentives consumers away from negative externalities, can align private incentives with society's interests and forces consumers and firms to take into account the social cost of a negative externality

social-benefit curve

Demand (WTP) curve that is private benefit + external benefit

Internalizing the externality

Altering incentives so that people take into account the external effects of their

actions

tradable pollution permits (cap and trade):better than taxes at eliminating pollution, create a new scarce resource (pollution permits) that polluters then trade, firm's willingness to pay depends on the cost of reducing pollution