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Marginal Social Cost
The additional cost imposed on society as a whole from I additional unit, MSC=MPC+MEC
Marginal social benefit
The additional benefit to society as a whole from one additional unit. MSB=MPB+MEB
Socially efficient
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 makes society has well off as possible
Asymmetric information
When the parties involved in a transaction, such as buyers and sellers, hold different information
Adverse selection
Can't distinguish between high and low cost customers
Moral hazard
Those with insurance for something have a tendency to avoid that thing less
External cost
A cost that an individual or a firm imposes on others without compensatingthem
External benefit
a benefit that an individual or a firm confers on others without receiving compensation
Externalities
External costs and benefits
Negative externalities
External costs
Positive Externalities
External benefits
Market failure
When the outcome in a market is inefficient
Marginal private benefit
The marginal benefit that accrues to consumers of a good, not including and external benefits
Marginal external benefit
The addition to external benefits created by one more unit of the good
Positive Consumption externality
Created by the consumption of a good/service
Positive Production Externality
A positive externality arising from the production of a good/service
Marginal Private Cost
A good is the marginal cost of producing that good, not including any external costs
Marginal External cost
The increase in external costs to society created by 1 more unit of that good
Negative consumption externality
Created by the consumption of a good/service
Coase Theorem
Payments btw private parties can achieve an efficient solution to externality problems as long as transaction costs are low enough
transaction costs
the costs to individuals of making a deal ex.) Costs of communication among parties, Costs of making legally binding documents, costly delays involved in bargaining
Internalize the externalities
When individuals take external costs/benefots into account
Excludable
If the supplier of that good can prevent people from consuming the good unless they pay for it
Rival in consumption
If the same unit of the good cannot be consumed by one more that one person at a time
Private good
Good that is excludable and rival in consumption
Nonexcludable
Supplier cannot prevent consumption by people who do not pay for it
Nonrival in consumption
if more than one person can consume the same unit of the good at the same time
Free-rider problem
Individuals have no incentive to pay for their own consumption and will free-ride on anyone who does pay
Public Good
nonexcludable and nonrival
Common Resource
Nonexcludable and Rival
Artificially Scarce
Excludable and nonrival
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/by producers and consumers
Marginal Cost Pricing
Occurs when regulators set a monopoly’s price equal to its marginal cost for 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 minimal annual income that is considered adequate to purchase the necessities of life
Poverty Rate
The % 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 better working conditions by bargaining collectively
Efficiency Wages
Wages that exceed the market equilibrium wage rate
Mean household Income
The avg income across all households
Median Income Household
The income of the household lying in the middle of the income distribution
Lorenz Curve
shows the percentage of all income recieved by the poorest 0% to poorest 100%
Gini Coefficient
A number that submarizes a country’s level of income inequality based on how unequally income is distributed
Means-tested
For poor people
In-kind
Benefits given through goods/services
Negative income tax
A program that supplements low-income workers
