Microeconomics Unit Two Review: Concepts 7-9

Consumer Surplus (CS): The difference between what consumers are willing to pay for a good or service and what they actually pay.
Producer Surplus (PS): The difference between what producers are willing to sell a good for and what they actually receive.
Total Surplus: The sum of consumer surplus and producer surplus; also referred to as social surplus or community surplus.
Goal of Microeconomics: Achieve allocative efficiency, where the quantity demanded equals the quantity supplied, leading to the greatest social surplus.

Definition: A tax imposed on the selling price of a product, affecting both firms and consumers by shifting the supply curve to the left.
Types of Indirect Taxes:
- Specific Tax: A fixed amount (e.g., $2 per pack of cigarettes).
- Ad Valorem Tax: A percentage of the price (e.g., 20% sales tax on alcohol).
Effects of Indirect Tax:
- Increases prices (p_c - price consumers pay).
- Decreases quantity demanded.
- Generates government revenue but can lead to lower consumer and increased producer surplus.
- Creates Deadweight Loss (DWL), a loss in welfare due to inefficient allocation of resources.

Definition: Financial support granted by the government to firms, reducing production costs and increasing supply.
Effect on Market:
- Price decreases (p_e - equilibrium price).
- Quantity increases in market supply.
- Lead to increased government spending and potential budget deficits.
- May also result in deadweight loss due to inefficiencies introduced into the market.

Price Ceiling:
- A maximum allowable price set by the government (e.g., rent controls).
- Creates a shortage as demand exceeds supply.
- Results in rationing issues and illegal markets.
Price Floor:
- A minimum allowable price (e.g., minimum wage).
- Creates a surplus as supply exceeds demand.
- Leads to loss of welfare and may require government intervention to manage surplus.

Public Goods:
- Goods that are nonexcludable and nonrivalrous (e.g., national defense).
- Often underprovided in free markets due to the Free Rider Problem, where individuals benefit without paying.
Externalities: Effects on third parties not involved in the transaction.
- Negative Externalities: Additional costs imposed on third parties (e.g., pollution).
- Positive Externalities: Additional benefits to third parties (e.g., education).
- Requires government intervention to internalize external costs or benefits (e.g., through taxes or subsidies).

Negative Externalities of Consumption: Consumption leading to societal costs (e.g., smoking).
- Government measures include taxation or regulation to reduce consumption.
Negative Externalities of Production: Production causing harm to society (e.g., industrial pollution).
- Government responses may involve taxes, regulations, or tradable emissions permits.
Common Resources:
- Nonexcludable and rivalrous resources that are overused without proper management (e.g., fisheries).
- Tragedy of the Commons: Excessive use leading to depletion.
- Requires management strategies to ensure sustainability (government regulation, community management).

Taxes: To decrease negative externalities and improve allocative efficiency.
Subsidies: To enhance positive externalities and encourage beneficial consumption or production.
Direct Provision: Government directly provides goods or services to optimize utility in areas underprovided by the market.
Legislation & Regulation: Enforce rules to protect social welfare and manage harmful effects of consumption/production.

The goal of microeconomic policies is to achieve a balance between efficiency and equity, ensuring that both societal welfare and individual rights are respected through appropriate government intervention when market failures occur.