AP Micro Test 6

Marginal Social Cost

The additional cost imposed on society as a whole by one additional unit

Marginal Social Benefit

The additional benefit to society as a whole from an additional unit

Socially Efficient

The level of output that maximizes the net gains for society by equating the marginal social cost and the marginal social benefit

Socially Optimal Quantity

The quantity that society would choose, taking all costs and benefits into account

Externalities

Side effects that cause the marginal social cost or marginal social benefit to diverge

Asymmetric Information

When the parties involved in a transaction, such as buyers and sellers, hold different information; also called private information

Adverse Selection

When some customers are more costly to serve than others, but sellers cannot distinguish between high-cost and low-cost customers (all-you-can-eat restaurants)

Moral Hazard

The tendency for those with insurance against some type of loss to take fewer precautions to avoid that loss

External Cost

An uncompensated cost that an individual or a firm imposes on others

External Benefits

A benefit that an individual or a firm confers on others without receiving compensation

Market Failure

When the outcome in a market is inefficient

Negative Externalities

Phrase for external costs

Positive Externalities

Phrase for external benefits

Marginal Private Benefit

The marginal benefit that accrues to consumers of the good, not including any external benefits

Marginal External Benefit

The addition to external benefits created by one more unit of the good

Marginal Social Benefit Equation

MSB = MPB + MEB

Positive Consumption Externality

Positive externality created by the consumption of a good or service.

Positive Production Externality

A positive externality arising from the production of a good or service

Technology Spillover

The most important single source of external benefits; this spreading of cutting-edge technological information among firms is known as technology spillover. Such spillovers often take place through face-to-face contact

Network Externalities

Exists when the value to an individual of a good or service depends on how many other people use the same good or service

Marginal Private Cost

The marginal cost of producing the good, not including any external costs

Marginal External Cost

The increase in external costs to society created by one more unit of the good

Marginal Social Cost Equation

MSC = MPC + MEC

Negative Production Externality

A negative externality caused by the production of a good or service

Negative Consumption Externality

A negative externality created by the consumption of a good or service

Coase Theorem

States that payment between private parties can achieve an efficient solution to externality problems as long as transaction costs are sufficiently low

Transaction Costs

The costs to individuals of making a deal

Internalize the Externalities

When individuals take external costs or external benefits into account

Private Good

Excludable and Rival in Consumption

Public Good

Nonexcludable and nonrival in consumption

Excludable

The supplier of that good can prevent people who do not pay from consuming it

Nonexcludable

The supplier cannot prevent consumption by people who do not pay for it

Rival in Consumption

If the same unit of the good cannot be consumed by more than one person at the same time

Nonrival in Consumption

If more than one person can consume the same unit of the good at the same time

Free-Rider Problem

Goods that are nonexcludable suffer from the free-rider problem: Individuals have no incentive to pay for their own consumption and instead will take a “free ride” on anyone who does pay

Examples of Public Goods

Disease prevention, national defense, scientific research

Common Resource

Nonexcludable and rival in consumption; you can’t stop others from consuming the good, and when they consume it, less of the good is available for you (fish in a lake)

Overconsumption

Individuals will continue to use it until their marginal private benefit is equal to their marginal private cost, ignoring the cost that this action inflicts on society as a whole

Artificially Scarce Good

A good that is excludable but nonrival in consumption (PPV movies)

Pigouvian Taxes

Taxes designed to correct for the inefficiencies of external costs

Pigouvian Subsidy

A payment designed to correct for the inefficiencies of external benefits

Environmental Standards

Rules that protect the environment by specifying limits for or actions by producers and consumers

Tradable Emissions Permits

Licenses to emit limited quantities of pollutants that can be bought and sold by polluters

Cap & Trade Program

A system of tradable emissions permits creates a market in rights to pollute

Those that find it easier to reduce pollution will sell some of their permits to those that find it more difficult; therefore those with the lowest cost will reduce their pollution the most, and those with the highest cost will reduce their pollution the least

Marginal Cost Pricing

Occurs when regulators set a monopoly’s price equal to its marginal cost to achieve efficiency

Average Cost Pricing

Occurs when regulators set a monopoly’s price equal to its average cost to prevent the firm from incurring a loss

Poverty Threshold

The minimum annual income that is considered adequate to purchase the necessities of life

Poverty Rate

The percentage of the population with incomes below the poverty threshold

Compensating Differentials

Wage differences across jobs that reflect the fact that some jobs are less pleasant or more dangerous than others

Unions

Organizations of workers that try to raise wages and improve working conditions for their members by bargaining collectively

Efficiency Wages

Wages that exceed the market equilibrium wage rate; employers use efficiency wages to motivate hard work and reduce worker turnover

Cycle of Poverty

Children who grow up with disadvantaged socioeconomic backgrounds are far more likely to remain trapped in poverty as adults, even after we account for differences in ability

Mean Household Income

Total income of all U.S. households divided by the number of households

Median Household Income

The income of the household lying in the middle of the income distribution

Lorenz Curve

Shows the percentage of all income received by the poorest members of the population, from the poorest 0% to the poorest 100%

Gini Coefficient

A number that summarizes a country’s level of income inequality based on how unequally income is distributed (A / (A+B))

Means-Tested

Program available only to individuals or families whose incomes fall below a certain level

In-Kind Benefits

A benefit given in the form of goods or services

Negative Income Tax

A program that supplements the income of low-income workers