Econ Unit 6

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